LIBRARY 

OF  THE 

University  of  California. 

Class 

■>: 

INSURANCE 

Science  and  Economics 


A  PRACTICAL  DISCUSSION 

OF  PRESENT-DAY  PROBLEMS  OF 

ADMINISTRATION,  METHODS 

AND  RESULTS 

For  Insurance  Officials,  Managers,  Agents,  Merchants 

Lawyers,  Teachers,  Students,  and  Others 

Interested  in  The  Broader  Aspects  of 

Insurance  as  a  Business  in  Its 

Relation  to  Public  Welfare 

and  the  State 

BY 

Frederick  L.  Hoffman 

Insurance  Statistician;    President  American  Statistical  Asso- 
ciation;  Fellow  Royal  Statistical  Society;   Member 
American   Economic  Association,  etc. 

Price,  $3,00 


1911 

THE  SPECTATOR  COMPANY 

Chicago  Office:  135  William  Street 

159  U  Salle  Stwet  NEW   YORK 


^0^ 


^'^J^ 


Copyright  1911 

BY  THE  SPECTATOR  COMPANY 

New  York 


•  •• 


To 

the  Memory  of 

my 

Father 

Augustus  Franciscus 

hoppmann 


O  O  I'l  o  <■  > 


TABLE  OF  CONTENTS. 

Page 

Introduction v 

Chapter  I. 
Life  Insurance  as  a  Science, , , , 5 

Chapter  IL 
Insurance  Economics, , 50 

Chapter  III. 
Insurance  as  an  Element  of  Early  Commerce 91 

Chapter  IV. 

The  Origin  and  Growth  of  Law  and  Legislation  on  Insur- 
ance      140 

Chapter  V. 

Life'  Insurance  Supervision  and  Government  Control  in 

Germany 228 

Chapter  VI. 
The  Taxation  of  Life  Insurance  Interests 268 

Chapter  VII. 
The  Tax  Burden  on  Life  Insurance  Policyholders .♦  283 

Chapter  VIII. 
The  English  Assurance  Companies'  Act  of  1909 326 

Chapter  IX. 
The  Law  of  Average 333 


PREFACE. 

The  modem  literature  of  insurance  in  all  its  branches, 
while  quite  extensive  and  practically  valuable,  is  largely  re- 
stricted to  the  consideration  of  matters  relating  to  the  office  and 
field  administration  of  insurance  companies.  Insurance,  as  a 
branch  of  contract  law,  has  a  literature  of  its  own,  which, 
however,  is  quite  limited  in  its  utility  to  the  student  of  insurance 
questions  and  problems  of  the  present  day.  As  yet,  only  a  few 
really  useful  works  have  been  written  in  English  on  the  larger 
and  broader  aspects  of  insurance  in  its  relation  to  public  policy 
and  the  functions  of  government  arising  out  of  the  corporate 
nature  of  insurance  institutions.  Obviously,  the  conduct  of  the 
business  cannot  be  called  entirely  successful  unless  insurance 
interests  are  intelligently  co-ordinated  to  an  enlightened  public 
opinion  demanding  economical  administration  on  the  one  hand, 
and  absolute  certainty  of  the  fulfillment  of  contractual  obligations 
on  the  other.  Insurance  today  is  an  indispensable  element  of  social 
and  commercial  life,  and  it  is  no  longer  exclusively  a  matter 
of  local  or  state  concern.  The  marvellous  growth  of  the  business 
within  recent  years  emphasizes  its  national,  and  even  interna- 
tional, importance  and  the  duty  of  government  to  conserve  the 
public  interests  represented  by  it  to  the  fullest  possible  extent. 
The  questions  and  problems  discussed  in  the  present  volume  are, 
therefore,  not  only  of  today,  but  of  the  future,  and  a  matter  of 
serious  concern  to  all  who  hold  responsible  positions  with  insur- 
ance companies,  or  ^ho,  in  some  capacity  or  another,  are  re- 
quired to  express  their  judgment  upon  public  questions  involv- 
ing insurance  considerations.  The  problem  of  a  more  perfect 
development  of  the  abstract  theory  and  of  a  better  practical 
adjustment  of  insurance  to  the  varying  needs  of  a  progressive 
society,  are  inherent  in  the  nature  of  the  business,  but  their 


PREFACE 

successful  solution  lies  largely  with  men  of  trained  minds  and 
impartial  judgment,  deservedly  entitled  to  the  full  confidence 
of  all  concerned.  The  present  work  is,  therefore,  intended  for 
the  better  and  more  adequate  study  of  insurance  as  a  branch 
of  economics,  while  the  large  number  of  references  appended 
to  the  several  chapters  will  facilitate  research  work,  where 
limitations  of  space  have  made  a  more  extended  treatment 
impossible.  The  bibliography  includes  most  of  the  princi- 
pal works  on  insurance,  from  the  earliest  times  to  the 
present  day,  useful  for  both  theoretical  and  practical  purposes, 
with  a  due  regard  to  the  historical  development  of  the  business 
and  the  complex  problems  arising  out  of  its  gradual  evolution 
from  the  most  primitive  form  of  individual  underwriting  to  a 
corporate  business  of  colossal  national  and  international  mag- 
nitude. 

For  a  full  quarter  of  a  century  I  have  been  actively  en- 
gaged in  the  business  of  insurance,  in  the  office  administration, 
as  well  as  in  the  field.  My  own  extensive  experience  has  forced 
upon  me  the  conviction  that  one  of  the  most  serious  shortcom- 
ings of  insurance  at  large  is  the  lack  of  proper  insurance 
education  on  the  part  of  many  of  the  men  who  discharge  re- 
sponsible functions,  as  managers,  agents,  or  other  field  and 
office  employees.  There  are  few  textbooks  of  real  value 
accessible  to  students  in  English,  although  many  such  are  con- 
veniently available  to  students  of  insurance  familiar  with  Ger- 
man or  French.  The  tendency  on  the  part  of  the  International 
Actuarial  Congress,  to  become  more  and  more  a  gathering  of 
men  interested  in  insurance  science,  after  the  manner  of  the 
German  national  society  by  that  name,  is  a  further  indication 
that  the  modern  trend  of  the  business  gives  promise  of  better 
results  in  the  years  to  come.  The  action  of  numerous  insti- 
tutions of  learning  which  have  introduced  insurance  courses, 
foreshadows  a  more  deliberate  and  practical  method  of  in- 
surance education  than  has  heretofore  been  possible,  or 
thought  necessary.  It  is,  therefore,  to  be  hoped  that  the  present 
volume  will  be  an  aid  in  this  direction  and  that  the  work  will 


PREFACE 

prove  useful  to  administrative  officers,  teachers,  managers, 
agents,  and  others  in  sympathy  with  the  larger  aims  and  ideals 
of  a  business  which  is  second  to  none  in  the  civilized  world. 

Frederick  L.  Hoffman. 

6 1  Washington  St.,  East  Orange,  N.  J. 
March  20,  191 1. 


Ill 


INTRODUCTION. 

Insurance  as  a  science  is  properly  considered  a  branch  of 
economics,  and  as  such  it  was  included  in  the  most  recent 
authoritative  classification  of  the  sciences,  adopted  by  the 
Congress  of  Arts  and  Sciences,  held  under  the  auspices  of  the 
Louisiana  Purchase  Exposition  in  1904.  At  this  congress  two 
papers  were  read  on  insurance,  the  first  on  "  Insurance  as  a 
Science,"  by  myself,  and  the  second,  on  "  Insurance  in  Its 
General  Aspects,"  by  Prof.  B.  H.  Meyer,  now  a  member  of 
the  Interstate  Commerce  Commission.*  Previous  classifications 
of  science  had  not  included  insurance,  although  as  early  as 
1865  Dr.  Engel,  the  director  of  the  Prussian  Statistical  Bureau, 
had  most  ably  presented  the  claims  of  insurance  to  scientific 
recognition  before  the  International  Statistical  Congress  held 
that  year  in  Berlin.  The  claim  of  insurance  to  the  dignity  of 
a  science,  however,  is  not  new,  for  certainly  as  early  as  1747 
a  small  tract  was  published  in  England,  by  Mr.  Corbyn  Morris, 
entitled,  "An  Essay  towards  illustrating  the  Science  of  Insur- 
ance. Wherein  it  is  attempted  to  fix,  by  precise  calculation, 
several  important  maxims  upon  this  subject;  to  solve  various 
problems,  and  cases  of  contest;  and  particularly  to  balance, 
whether  it  be  nationally  advantageous  to  insure  the  ships  of 
our  foreign  enemies."  John  Weskett,  merchant,  who  in  1781 
published  an  elaborate  and  classical  digest  "  Of  the  Theory, 
Laws  and  Practice  of  Insurance,"  particularly  emphasized  its 
scientific  aspects  and  observed  that,  "  There  is  scarcely  any 
other  occupation,  or  profession,  though  far  more  unimportant, 
and  less  abstruse  or  complicate  than  that  of  insurance,  amongst 

*  "  Proceedings  of  the  Congress  of  Arts  and  Science,"  St.  Louis,  Mo., 
1904,  in  8  vols.  Published  by  Houghton,  Mifflin  &  Co.,  Boston,  1906, 
Vol.  VII,  p.  207,  et.  seq 


INTRODUCTION 

the  whole  circle  of  arts  and  commerce  exercised  in  this  king- 
dom, where  some  method  of  instruction  is  not  looked  upon  as 
requisite;  and,  where  the  persons  employed  in  it  are  not  pretty 
well  versed  in  the  grounds  and  theory,  and  the  greater  part 
of  them  expert  in  the  practice  of  the  principles  on  which  it 
ought  to  be  prosecuted: — ^but,  one  may  venture  to  assert  that, 
in  no  other  class  is  there  to  be  perceived  so  great  a  proportion 
of  a  numerous  body  of  practitioners,  who  are  so  incompetently 
skilled  in  the  nature  of  the  matters  about  which  they  are 
occupied,  and  of  the  laws  and  rules,  by  which  they  ought  to 
be  governed,  as  amongst  those  who  are  in  the  actual  employ- 
ment of,  and  whose  avocations  and  concerns  are  immediately 
connected  with,  affairs  of  insurance."  What  was  true  of  this 
early  period,  when  insurance  was  in  its  infancy,  is  equally  true 
at  the  present  time,  that  insurance  education  is  generally 
neglected  and  upon  even  important  matters  of  theory  and 
practice  there  still  exists  much  confusion  and  doubt,  which 
only  thoughtful  consideration  and  painstaking  analysis  can 
set  aside.  The  field  of  research  is  immense.  The  history  of 
the  business  is  largely  unwritten  and  the  works  of  classical 
writers  are  difficult  of  access  to  the  student  of,  insurance  who 
desires  to  sustain  his  reasonings  and  conclusions  by  the  same 
substantial  foundation  of  knowledge  as  is  required  in  every 
other  branch  of  science. 

■^  Insurance  as  a  branch  of  economics  has  also  been  much 
neglected  by  writers  on  political  and  social  economy,  but  during 
very  recent  years  there  has  been  an  awakening  of  interest  in 
the  economic  theory  of  risk  and  insurance,  whic"h  seems  to 
indicate  a  more  extended  and  qualified  consideration  of  the 
subject  in  the  future.  It  is  still  an  open  question  as  to  which 
of  the  three  general  divisions  of  political  economy — that  is, 
production,  distribution  and  consumption — should  comprehend 
insurance,  or  whether  the  factor  of  risk  assumption  and  dis- 
tribution, through  insurance,  is  not  inherent  in  them  all.  The 
practical  importance  of  such  consideration  is  particularly 
apparent  in  the  far-reaching  issues  involved  in  the  question 


INTRODUCTION 

whether  insurance  is  commerce  within  the  meaning  of  the 
commerce  clause  of  the  Constitution,  although  a  number  of 
decisions  of  the  Supreme  Court  have  heretofore  been  to  the 
contrary.  If  economic  theory  sustains  the  conclusion  that 
insurance  is  an  element  in  the  cost  of  production,  and  perhaps 
as  much  so  in  distribution,  it  is  difficult  to  escape  the  conviction 
that  insurance  transactions  fall  properly  within  the  scope  of 
commercial  undertakings,  intercourse  or  trade,  by  whatsoever 
means  or  methods  the  same  may  be  carried  on.  It  requires  no 
very  extended  research  into  the  standard  works  on  insurance 
theory,  practice  and  law  on  the  one  hand,  and  commercial 
theory,  practice  and  law  on  the  other,  to  sustain  the  view  that 
from  the  very  earliest  time  insurance  transactions  have  been 
considered,  and  invariably  so,  as  being  commercial  transactions 
within  the  same  meaning  and  scope  as  bills  of  lading,  bills  of 
exchange,  and  other  negotiable  instruments  of  various  kinds. 
In  the  brief  discussion  of  insurance  as  an  element  of  early 
commerce  only  a  few  of  the  foremost  authorities  have  been 
drawn  upon,  to  avoid  needless  elaboration  and  wearisome 
repetition  of  detail.  A  discussion  of  insurance  as  an  element 
of  modem  commerce  would  easily  make  a  volume  by  itself, 
with  a  due  regard  to  the  numerous  branches  of  insurance  which 
have  been  developed  within  recent  years.  Their  mere  enumera- 
tion is  sufficient  to  emphasize  the  practical  commercial  aspects 
of  insurance  as  a  necessary  factor  in  mercantile  adventure, 
commercial  credit,  and  national  advance.  By  way  of  illustra- 
tion, reference  may  be  made  to  through  bills  of  lading,  which 
include  the  assumption  of  risk  on  the  part  of  the  carrier 
in  transportation  by  land,  while  long  usage  has  required 
the  assumption  of  the  risk  in  navigation  by  the  shipper  and 
the  general  custom  of  covering  such  shipments  by  marine 
insurance.*     Every  through  bill  of  lading,  therefore,  contains 

*  It  is  stated  in  the  Compendiiim  of  the  Official,  Southern  and  Western 
Freight  Classifications,  published  by  the  U.  S.  Dep't  of  Agriculture  in 
1 910,  that  "  The  cost  of  insurance  against  marine  risk  will  not  be  assumed 
by  carriers  imless  specifically  provided  for  in  tariffs." 


INTRODUCTION 

a  Special  reference  to  the  limited  liability  of  carriers  in  this 
respect,  while  every  invoice  of  a  through  shipment  from  inland 
points  to  places  abroad  includes  a  certificate  of  insurance  for 
the  full  and  necessary  protection  of  the  cargo  against  loss. 

Reference  may  also  be  made  to  an  important  aspect  of 
insurance  in  its  relation  to  American  shipping,  for  there  is 
apparently  much  justification  in  the  assertion  of  those  who 
hold  that  the  decline  in  the  American  merchant  marine  was  in 
part  the  result  of  unfair  classification  by  Lloyds  of  our  ships 
during  a  critical  period  in  the  evolution  of  shipping,  and 
furthermore  that  the  American  inarket  for  marine  insurance 
is   entirely   insufficient  for  American  needs.* 

For  the  study  and  qualified  consideration  of  questions  and 
problems  of  this  kind  there  is  need  of  the  accessibility  of  the 
classical  writings  on  insurance,  which  are  now  extremely  rare. 
Few  even  of  those  who  have  given  much  time  and  thought  to 
the  practical  development  of  the  business  of  insurance  are 
aware  of  the  wealth  of  literary  material  available  for  a  history 
of  insurance  and  a  critical  outline  of  the  development  of  insur- 
ance theory  and  practice  from  the  earliest  times.  Every  stu- 
dent of  law  and  legislation  is  familiar  with  the  ancient  maritime 
codes  or  sea-laws,  of  which  the  earliest  is  the  Rhodian  Sea-law, 
which  during  the  last  few  years  has  been  made  accessible  through 
the  elaborate  translation  from  original  manuscripts  by  Mr. 
Walter  Ashburner.  All  that  there  is  contained  in  this  fragment 
of  law,  which  dates  back  to  about  900  B.  C,  has  its  practical 
bearing  upon  modern  methods  of  insurance,  for  the  ancient 
doctrines  of  contributionship  and  average,  jettison  and  salvage, 
maritime  loans  and  other  matters,  are  still  held  and  applied  in 
the  courts  of  law  of  every  civilized  nation,  including  our  own. 

What  Mr.  Ashburner  points  out  in  his  discussion  of  the 
Rhodian  Sea-law  is,  unfortunately,  true  also  of  modern  times, 

*  Hearings  before  the  Senate  Commission  on  Merchant  Marine,  Vol. 
I,  p.  192  et.  seq.  Senate  Report  No.  2755,  58th  Congress,  3d  Session, 
Washington,  D.  C,  1905.  See  also  the  Report  of  the  U.  S.  Commissioner 
of  Navigation  for  1890,  p.  97  et.  seq. 

viii 


INTRODUCTION 

in  that  the  ruthless  destruction  of  commercial  documents  has 
deprived  the  students  of  law^nd  legislation  of  much  valuable 
material  which  is  now  irrevocably  lost.  A  thorough  study  of 
insurance  is  out  of  the  question  until  the  works  of  the  classical 
writers,  the  elaborate  treatises  by  Magens,  Molloy,  Postlethwayt, 
Beeves,  Weskett,  Caines  and  many  others  are  made  accessible, 
and  until  even  the  still  earlier  treatises  on  insurance  in  Latin  ai^ 
made  available  in  English  as  a  necessary  basis  for  a  sound 
understanding  of  the  ancient  origins  out  of  which  the  modem 
structure  of  insurance  has  developed.  Early  laws  and  ordi- 
nances dating  back  to  the  13th  and  14th  centuries,  are  full 
of  meaning  even  at  the  present  day.  Study  of  their  provisions 
proves  conclusively  that  from  the  very  beginning  of  insurance 
as  a  business  the  insurance  contract  has  been  a  matter  of 
government  supervision  and  control.  Historical  evidence  is 
not  wanting  to  prove  that  as  early  as  12 27-1 234  bottomry 
loans  were  prohibited  by  papal  decree  on  the  ground  of  their 
being  contrary  to  public  policy,*  while  as  early  as  1568  insur- 
ance was  prohibited  by  the  Duke  of  Alba  as  Regent  of  the 
Netherlands, t  and  contracts  or  agreements  in  various  forms, 
wagering  or  gambling  policies,  etc.,  have  been  prohibited  from 
time  to  time  by  different  governments  practically  throughout 
the  entire  modem  history  of  the  business. 

Insurance  law  as  it  is  laid  down  iji  the  commentaries  of 
Blackstone  and  Kent,  is  not  only  an  indispensable  requirement 
in  a  full  course  of  legal  study,  but  it  is  equally  valuable  and 
necessary  to  the  student  of  insurance  in  general.  Kent,  in  his 
remarks  upon  the  insurance  contract  and  its  gradual  develop- 
ment through  the  course  of  centuries,  observed,  with  reference 
to  the  value  of  insurance  as  an  element  of  commerce: 

"  The  business  of  uncovered  navigation  or  trade  would  be 
spiritless  and  presumptuous.  The  contract  of  insurance  pro- 
tects, enlarges,  and  stimulates  maritime  commerce;  and  under 
its  patronage,  and  with  the  stable  security  which  it  affords, 

*  Plass,  "  Geschichte  dcr  Assecuranz,"  Hamburg,  1902,  p.  19. 
t  Plass,  ibid,  p.  32. 

ix 


INTRODUCTION 

commerce  is  conducted  with  immense  means  and  unparalleled 
enterprise,  over  every  sea,  and  to  the  shores  of  every  country, 
civilized  and  barbarous.  Insurers  are  societies  of  capitalists, 
who  are  called  by  their  business  to  study  with  profound  sagacity, 
and  with  exactness  of  calculation,  the  geography  and  naviga- 
tion of  the  globe,  the  laws  of  the  elements,  the  ordinances  of 
trade,  the  principles  of  international  law,  and  the  customs, 
products,  character,  and  institutions  ol  every  country  where 
tide  waters  roll,  or  to  which  winds  can  waft  the  flag  of  their 
nation." 

A  business  of  the  magnitude  of  modern  insurance  is  en- 
titled to  a  literature  of  its  own,  a  series  of  thoroughly  digested 
text-books,  a  well  established  code  of  fundamental  principles 
of  law  and  legislation,  and  a  national  institute  for  promoting 
knowledge  and  developing  the  arts  or  methods  by  which  sound 
theory  can  best  be  carried  into  practical  effect.  The  time  is  slowly 
passing  when  the  acquisition  of  new  insurance  through  effec- 
tive solicitation  will  constitute  the  chief  consideration  of  success. 
Evidently  it  requires  no  argument  however,  to  sustain  the 
position  of  those  who,  during  the  formation  period  of  the 
business,  against  almost  insuperable  odds,  have  adhered  to  the 
idea  of  aggressive  solicitation  even  at  considerable  expense 
to  advance  the  cause  of  insurance  among'  every  element  of 
the  population,  from  the  poor  and  ignorant  to  the  well  to  do 
and  well  informed.  The  insurance  idea  is  subtle  and  difficult 
of  clear  comprehension  except  in  actual  commerce,  where 
the  necessity  of  insurance  protection  is  so  obvious  and  self- 
evident  that  it  requires  no  argument  or  endorsement,  as  is 
made  clear  by  the  rapid  growth  of  marine,  fire,  and  other 
forms  of  property  insurance,  which  are  now  quite  generally 
made  use  of  without  the  aid  of  much  active  personal  solicita- 
tion. In  life,  accident,  and  many  other  forms  of  insurance, 
the  difficulties  in  this  respect  are  more  serious,  and  the  pro- 
gress of  insurance  education  is  necessarily  a  slower  one. 

In  the  course  of  time,  however,  the  insurance  idea  is 
becoming  more  famihar  to  the  masses,  and  the  sense  of  insur- 
ance obligations  as  a  matter  of  personal  or  property  protection 


INTRODUCTION 

tends  to  become  subconscious,  and  indifference  and  opposition 
must  gradually  disappear.  With  increasing  education  and  the 
spread  of  general  knowledge  on  the  one  hand,  and  the  impera- 
tive need  of  economic  security  against  the  casualties  or  calami- 
ties of  life,  on  the  other,  the  social  necessity  of  insurance  will 
become  more  obvious  and  the  future  growth  of  the  business  will 
be  more  and  more  the  resultant  of  its  own  momentum.  In  other 
words,  insurance,  from  being  purely  a  form  of  business  enter- 
prise or  associated  effort  for  mutual  protection,  tends  slowly  but 
surely  to  become  a  social  and  economic  institution,  the  evidence 
of  which  is  met  with  to  an  increasing  extent  in  so-called  gov- 
ernment insurance,  or  compulsory  insurance,  or  quasi  forms  of  in- 
surance, state  security  and  guaranty,  which  imperceptibly  shade 
off  into  the  theory  and  practice  of  true  insurance.  The  most 
interesting  proof  of  this  assertion  is  to  be  found  in  the  elaborate 
consideration  on  the  part  of  an  English  parliamentary  commit- 
tee of  a  national  guaranty  for  the  war  risks  of  shipping,  which 
arose  out  of  the  previous  considerations  of  a  Royal  Commission 
on  the  supply  of  food  and  raw  material  in  time  of  war.  It  is  a 
serious  but  common  error  to  seek  for  insurance  knowledge  only 
among  the  readily  accessible  sources  of  information.  It  is,  for 
illustration,  only  known  to  the  very  few,  that  the  very  stamp 
act  which  led  to  the  American  revolution  included  stamp  duties 
upon  policies  of  insurance.  It  is  also  not  generally  known,  if 
at  all,  that  a  corresponding  act,  imposing  stamp  duties  upon 
policies  of  insurance,  was  passed  by  the  U.  S.  Congress  as  early 
as  1797.  The  Annals  of  Congress,  and  even  the  Abridged 
Debates,  by  Benton,  from  1789  to  1856,  contain  numerous  and 
important  discussions  of  insurance  matters  which  are  not  even 
mentioned  in  the  few  historical  works  on  insurance  in  the 
United  States.  In  the  Journals  of  the  Continental  Congress 
are  contained  a  number  of  articles  suggestive  of  proposals 
for  annuity  schemes  as  revenue  measures  to  provide  funds 
for  carrying  on  the  war  of  the  Revolution,  while  the  early 
messages  of  the  governors  of  the  different  states  contain 
important  references  to  insurance  of  great  historical  and  more 

id 


INTRODUCTION 

or  less  practical  value  today.  The  proceedings  of  commer- 
cial associations  often  contain  important  deliberations  upon 
particular  phases  of  insurance,  and  the  subject,  among  others, 
was  brought  before  the  Industrial  Commission  and  the  Senate 
Commission  on  the  Merchant  Marine.  An  able  discussion  of 
marine  insurance  in  its  practical  relations  to  freight  charges 
and  the  whole  problem  of  transportation  by  water  is  contained 
in  the  report  on  that  subject  by  the  Commissioner  of  Corpora- 
tions, while  numerous  cases  on  admiralty  law,  particularly  the 
case  of  Insurance  Co.  vs.  Dunham,  abound  with  suggestive 
judicial  opinion  which  have  a  direct  bearing  upon  the  further 
development  of  sound  insurance  theory  and  the  perfection  of 
the  policy  contract  of  insurance  in  all  its  branches.* 

The  most  urgent  requirement  today  is  for  carefully  prepared 
text -books  on  insurance,  and  the  correction  or  re-statement  of 
discussions  of  insurance  practice  in  text-books  on  arithmetic, 
and  higher  mathematics.  The  subject  of  insurance  in  its 
entirety  requires  to  be  taught  in  our  leading  universities,  not 
primarily  for  the  purpose  of  training  men  to  become  insur- 
ance managers,  actuaries,  or  specialists  in  particular  depart- 
ments, but  as  a  branch  of  science  in  the-  same  sense  and  as 
physics,  geology,  chemistry,  mechanics,  banking,  transportation, 
etc.,  are  taught.  The  higher  form  of  teaching  is,  however, 
out  of  the  question  until  proper  text-books  are  provided, 
in  which  the  principles  and  elements  of  insurance  shall  be 
authentically  set  forth  so  that  they  may  safely  be  used  as 
evidence  in  legal  controversies  and  settlements  of  differences  of 


*  Among  modem  works  which  take  cognizance  of  insurance  as  an  ele- 
ment of  commerce  are,  "Lessons  in  Commerce"  by  Gambroro  and  Gault, 
5th  Ed.,  London,  1904,  and  'An  Essay  on  the  Early  History  of  the  Law 
Merchant,"  by  W.  Mitchell,  Cambridge  University  Press,  1904.  Among 
earlier  works  which  should  be  consulted  are,  "Proceedings  of  the  Com- 
mercial Convention  held  in  Detroit,  July,  1865,"  and  "The  National  and 
Private  Alabama  Claims  and  their  Final  and  Amicable  Settlement",  by 
Chas.  C.  Beaman,  187 1;  also,  "The  Report  of  the  Commissioner  of  Cor- 
porations on  Cotton  Exchanges,"  Washington,  1908,  and  "  Sea  Law  and 
Sea  Power,"  by  T.  Gibson  Bowles,  London,  19 10. 

xii 


INTRODUCTION 

Opinion  concerning  the  proper  meaning  of  particular  terms. 
The  general  teaching  of  insurance  as  an  element  of  commercial 
law  as  well  as  of  contract  law  generally,  requires  also  to  be 
much  improved,  and  the  movement  for  uniformity  in  insurance 
legislation  requires  to  be  more  actively  fostered  than  has  here- 
tofore been  the  case.  The  pressing  need  of  federal  supervision 
of  insurance;  of  expert  codification,  and  of  equitable  insurance 
taxation,  are  entitled  to  the  most  serious  consideration,  not 
only  on  the  part  of  those  engaged  in  the  business  of  insurance, 
but  of  lawyers,  merchants,  bankers,  economists,  and  others 
whose  judgment  and  experience  would  aid  in  the  solution  of 
pending  questions  which  at  present  are  largely  a  matter  of 
chance  opinion  and  of  drifting  public  policy. 

*  Never  before  was  there  a  time  when  insurance  in  its  vari- 
ous aspects  received  as  much  public  consideration  as  today. 
Questions  and  problems  of  old-age  pensions,  contributory 
schemes  or  retirement  funds,  workmen's  compensation  and 
employers*  liability,  government  insurance,  unemployment  in- 
surance, agricultural  insurance,  and  industrial  accident  insur- 
ance, aside  from  the  question  of  safe  and  economical  adminis- 
tration of  state  chartered  corporations,  are  now  subjects  of 
general  discussion,  committee  hearings,  legislative  debates,  and 
state  action,  with  the  practical  certainty  that  more  or  less 
serious  errors  of  material  consequence  will  result  from  imper- 
fectly considered  plans  or  ill-considered  schemes.  The  necessary 
aid  must  come  from  those  who  have  seriously  deliberated  upon 
'these  questions  and  who  bring  a  ripe  knowledge  and  large 
experience  to  bear  upon  conclusions  and  recommendations  as 
to  what  is  and  what  is  not  compatible  with  the  highest  grounds 
of  public  policy.  In  this  sense  I  would  interpret  the  modem 
conception  of  insurance  education  as  a  branch  of  science  and 
economics,  as  an  important  department  of  the  common  and 
statutory  law,  and  finally  as  a  proper  subject  for  historical 
inquiry  and  qualified  technical  research. 


CHAPTER  I 
LIFE  INSURANCE  AS  A  SCIENCE. 

The  first  inclusion  of  insurance  in  an  authoritative  classi- 
fication of  the  sciences  occurred  in  1904,  when  the  Interna- 
tional Congress  of  Arts  and  Science,  which  met  that  year  under 
the  auspices  of  the  Louisiana  Purchase  Exposition,  assigned 
to  life  insurance  its  proper  place  as  a  branch  of  economics, 
which,  broadly  defined,  is  "the  science  of  the  relation  between 
private  property  and  public  wealth."  The  honor  of  having 
been  the  first  to  assign  a  definite  place  to  insurance  in  the 
science  of  economics  appears  to  belong  to  Mr.  Henry  Dunning 
Macleod,  whose  conception  of  economics  comprehends,  first, 
material  things;  second,  personal  qualities,  both  in  the  form 
of  labor  and  credit;  and  third,  annuities.  Most  of  the  works 
on  political  economy  and  social  science  are  barren  of  references 
to  the  third  department,  which,  for  want  of  a  better  term, 
Macleod  defines  as  annuities,  or  "the  right  to  receive  a  series 
of  future  payments."  Such  rights  he  terms  "negative  economic 
quantities,"  comprehending  all  mercantile  and  banking  credits, 
checks,  bills  of  exchange,  terminable  annuities,  leaseholds,  poli- 
cies of  insurance  of  different  kinds,  and  many  other  valuable 
rights,  amounting  in  value  to  thousands  of  millions  of  dollars, 
of  which  there  is  scarcely  anyj  notice  in  the  text-  books  on 
economics.  He  very  properly  remarks  that  by  introducing 
this  class  of  incorporeal  property,  he  has  doubled  the  field  of 
economics. 

To  establish  the  relation  of  the  science  of  insurance  to 
the  other  great  divisions  of  accurate  and  systematized  human 
knowledge  is  the  purpose  of  this  discussion,  and  the  more  defi- 
nitely this  relation  is  established,   the  more  clearly  we  shall 


LIFE   INSURANCE   AS   A   SCIENCE 

comprehend  the  true  nature,  possibilities,  and  results  of  insur- 
ance as  a  vast  and  indispensable  social  institution  of  today. 

Insurance,  reduced  to  its  simplest  terms,  means  the  appli- 
cation of  the  principle  of  association  to  the  equalization  of 
losses  resulting  from  the  inherent  uncertainty  in  human  affairs. 
This  is  the  risk  of  untimely  death,  of  fire,  shipwreck,  burglary, 
windstorms,  floods,  and  many  other  contingencies  outside  of  the 
control  of  man.  The  uncertainty  of  human  life  is  modified  by 
social  progress,  in  particular  by  the  advances  in  medicine  and 
I  related  sciences,  but  there  must  always  remain  the  risk  of  pre- 
mature death,  which  insurance  alone  can  equalize  through  the 
principle  of  association.  In  the  classic  language  of  the  first 
Select  Committee  on  Friendly  Societies,  in  1825,  it  seems 
that  "wherever  there  is  a  contingency,  the  cheapest  way  of 
providing  against  it  is  by  uniting  with  others;  so  that  each 
man  may  subject  himself  to  a  small  deprivation  in  order  that 
no  man  may  be  subjected  to  a  great  loss.  He  upon  whom 
the  contingency  falls  does  not  get  his  money  back  again,  nor 
does  he  get  for  it  any  visible  or  tangible  benefit,  but  he  obtains 
security  against  ruin,  and  consequent  peace  of  mind." 

Theory  of  Risk  and  Insurance. 
The  theory  of  risk  and  insurance  has  been  elaborated  and 
set  forth  by  Mr.  Allan  H.  Willett  in  a  most  instructive  disser- 
tation published  by  Columbia  University  in  1901.  He  holds, 
and  very  properly  so,  that  as  a  general  rule  uncertainty  exer- 
cises a  repellent  influence  in  human  life  and  that  the  existence 
of  risk  in  an  approximate  static  state  causes  an  economic  loss, 
while,  on  the  other  hand,  the  assumption  of  risk  is  a  source  of 
gain  to  society.  From  this  point  of  view  the  business  of  insur- 
'ance  does  not  differ  essentially  from  general  commercial  enter- 
prises. Risk  is  assumed  in  mining  and  agriculture  in  much  the 
same  manner  as  risk  is  assumed  in  the  business  of  insurance, 
but  in  life  insurance,  for  illustration,  the  assumption  of  a  risk  and 
the  equivalent  premium  payments  required  are  determined  by 
the  theory  of  probability  and  the  established  laws  of  human 

6 


LIFE    INSURANCE    AS    A   SCIENCE 

mortality  and  observed  experience.  In  general  commercial 
enterprise  the  risk  assumed  is,  as  a  rule  created,  while  in  insur- 
ance the  risk  assumed  is  pre-existing.  This  marks  the  broad 
division  between  gambling,  speculation  and  insurance.  Insur- 
ance is  not  "in  the  nature  of  a  bet,"  for  in  insurance  an  effort 
is  made  to  eliminate  an  existing  risk  by  its  assumption  on  the 
part  of  the  many,  while  in  gambling  a  non-existing  risk  is  cre- 
ated with  resulting  uncertainty  and  needless  loss  to  society. 

The  gain  resulting  to  society  is  the  reduction  of  the  uncer- 
tainty for  the  group  as  a  whole,  or  the  substitution  of  certain 
loss  for  uncertain  loss.  By  this  process  of  diminishing  the 
degree  of  uncertainty,  the  cost  of  the  risk  to  society  is  very 
largely  and  considerably  reduced,  if  not  entirely  eliminated,  and 
thus  it  follows,  in  the  words  of  Willett,  that  "the  risk  an  insur- 
ance company  carries  is  far  less  than  the  sum  of  the  risks  of  the 
insured,  and  that  as  the  size  of  the  company  increases,  the  dis- 
proportion becomes  greater" ;  or,  to  use  the  definition  of  Roscher: 
**  The  aggregate  danger  is  less  than  the  sum  of  the  individual 
dangers,  for  the  risk  of  it  is  more  certain,  and  uncertainty  itself 
is  an  element  of  danger."  It  is  of  the  utmost  importance  that 
this  point  should  be  thoroughly  realized  by  the  statesman  and 
the  general  public,  so  that  from  individual  appreciation  of  insur- 
ance as  a  beneficent  social  institution  may  evolve  the  national 
appreciation  of  insurance  as  an  institution  making  for  the 
security  of  society  and  the  well-being  and  effective  protection 
of  its  members  against  the  uncertainties  of  human  life. 

Applied  Ethics. 

At  the  outset  we  must  consider  the  relation  of  insurance  / 
to  ethics,  for  unless  the  business  of  insurance  has  the  sanction 
of  private  and  public  morality  it  would  be  to  no  purpose  to 
discuss  its  social  and  economic  importance.  One  of  the  earliest 
objections  to  life  insurance  arose  from  the  view  that  it  was  a  form 
of  gambling  and  that  to  insure  one's  life  was  not  quite  in  har- 
mony with  religious  duty.  Even  to-day  a  religious  sect  called  the 
Dunkards  object  to  life  insurance  on  the  ground  that  it  has  not 

7 


\ 


LIFE   INSURANCE   AS   A   SCIENCE 

biblical  sanction,  or  at  least,  is  not  specifically  enjoined  as  a 
duty  by  biblical  authority.  Few  things,  however,  it  would  seem, 
are  more  readily  susceptible  of  proof  than  that  insurance  must 
of  necessity  be  included  in  the  moral  forces  which  make  for 
the  betterment  of  mankind,  and  especially  for  the  gradual 
amelioration  of  the  condition  of  the  poor.  Life  insurance  in 
;  particular  appeals  to  man's  moral  sentiments,  making  for  the 
protection  and  support  of  others  at  the  cost  of  self-sacrifice  and 
self-denial.  So  well  has  this  been  reaHzed  that  almost  from  its 
earliest  history  we  hear  of  the  duty  of  insurance,  until  to-day 
this  sentiment  has  become  subconscious  and  a  part  of  the 
conscience  of  civilized  man,  practically  the  same  under  con- 
ditions of  poverty  as  under  conditions  of  material  well-being. 

Much  injury  has  been  done  to  the  cause  of  insurance  by 
the  unfortunate  and  unwarranted  assumption  that  there  is  a 
fundamental  identity  between  insurance  and  gambling.  There 
is  this  much  truth  in  the  assumption,  that  the  fundamental 
laws  of  chance  and  probability  have  at  times  and  with  great 
skill  been  applied  to  efforts  at  systematic  gambling,  but  speaking 
generally,  without  much  success.  Gambling,  lotteries,  and 
kindred  attempts  to  gain  by  the  losses  of  others  are  intrinsically 
immoral  in  their  results,  while  life  insurance  is  intrinsically 
moral  as  a  method  and  means  for  the  advancement  of  mankind. 
Insurance  advances  progress,  while  gambling  retards  it.  This 
fact  is  well  brought  out  by  Dymond  in  his  Essays  on  Morality, 
and  is  indorsed  by  Wayland  in  his  Elements  of  Moral  Science. 
Dymond  remarks,  with  particular  reference  to  the  duty  of  in- 
surance against  fire,  that  **the  merchant  who  conducts  his 
business  partly  or  wholly  with  borrowed  capital  is  not  honest 
if  he  endangers  the  loss  of  an  amount  of  property  which,  if  lost, 
would  disable  him  from  paying  his  debts."  To  guard  against 
this  possible  loss  he  holds  that  it  would  be  unjust  under  such 
circumstances  not  to  insure,  for  the  majority  of  uninsured 
traders,  if  their  houses  and  goods  were  burned,  would  be  unable 
to  pay  their  creditors.  The  injustice,  in  his  opinion,  consists 
in  the  taking  of  needless  or  unnecessary  risk.    Had  life  insurance 

8 


LIFE   INSURANCE   AS   A   SCIENCE 

in  1836,  when  this  was  written,  been  developed  to  the  present 
extent  of  a  universal  provident  institution,  the  Quaker  moralist 
would,  without  question,  have  enjoined  with  even  greater 
emphasis  the  duty  of  insurance  protection  for  widows  and 
orphans  and  self-protection  against  want  in  old  age. 

Insurance  Mathematics. 

The  second  great  division  of  modem  science  is  mathe- 
matics, itself  the  foundation  stone  of  insurance  theory  and 
development.  Without  mathematics  life  insurance  could  not 
be  thought  of  as  a  science,  nor  could  its  progress  long  con- 
tinue without  the  application  of  mathematical  checks  to 
intricate  processes,  the  real  nature  of  which  can  only  be 
explained  by  mathematical  researches.  It  has,  in  fact,  been 
common  usage  for  many  years  to  speak  of  the  work  of  the 
actuary  as  actuarial  science,  and  the  training  of  the  actuary 
and  the  required  quality  of  his  judgment  is  very  largely 
mathematical.  It  is  a  primary  necessity  if  he  is  to  possess  the 
ability  to  master  the  more  subtle  problems  of  insurance  theory. 
It  is,  however,  with  much  justice  that  Young  and  other  writers 
hold  that  "every  problem  in  Hfe  insurance  administration — the 
scope  of  investments,  the  ratio  of  expenditure,  and  the  amount 
of  new  business  which  will  probably  produce  a  favorable  or 
disadvantageous  effect  upon  profits — possesses  an  actuarial 
aspect  of  definite  significance,  and  demands  the  application 
of  professional  knowledge  and  experience."  But  primarily  the 
work  of  the  actuary  is  concerned  with  the  mathematical  and 
fundamental  nature  of  life  insurance  as  determined  by  the 
laws  of  human  mortality  and  expectancy,  upon  which  the  vast 
business  rests  with  absolute  certainty  for  the  ultimate  fulfill- 
ment of  contract  obligations.  Some  of  the  greatest  names  in 
mathematical  science  and  astronomy  are  those  of  men  who  have 
rendered  signal  service  to  the  cause  of  insurance.  From  Fermat 
and  Pascal,  Newton  and  Leibnitz,  Bernoulli  and  DeMoivre, 
Laplace  and  Quetelet,  we  have  a  long  list  of  mathematical 
philosophers  extending  to  the  present  time,  whose  work  has 

9 


LIFE   INSURANCE   AS    A   SCIENCE 

made  possible  the  development  of  the  science  of  life  contingencies. 
It  is  upon  the  science  of  mathematics  that  the  science  of 
insurance  rests,  and  it  is  the  actuary  who  applies  abstract 
mathematical  principles  to  the  solution  of  practical  prob- 
lems of  business  administration.  Hence  the  actuary  must 
be  more  than  a  mathematician,  and  the  tendency  of  the 
age  is  constantly  to  enlarge  the  function  of  this  office 
by  delegating  the  purely  mathematical  side  of  the  work 
to  qualified  mathematicians.  Much  remains  to  be  done  in  the 
field  of  insurance  mathematics  to  develop  the  science  and  art 
of  life  contingencies  to  its  highest  possible  degree  of  perfection. 
Great  indeed  as  is  the  work  of  Woolhouse,  Gompertz,  Makeham 
and  Young,  each  period  presents  problems  of  its  own  which  de- 
mand the  specialization  of  expert  talent,  never  needed  to  such 
an  increasing  extent  as  in  the  administration  of  a  great  and 
successful  life  insurance  company  of  to-day. 

Biological  Science. 

Biological  science,  or  the  science  of  living  things,  rests, 
in  a  larger  measure  than  is  commonly  assumed,  upon  a  statistical 
foundation.  Much,  if  not  most,  of  what  life  insurance  companies 
require  to  know  of  biology  for  the  medical  selection  of  risks 
relates  to  normal  and  abnormal  man  from  the  viewpoint  of 
anatomy  and  physiology.  American  anthropometry,  while  well 
advanced  since  the  army  statistics  by  Gould  were  published  in 
1869,  as  a  memoir  of  the  Sanitary  Commission,  leaves  much  to 
be  attained  before  we  shall  be  in  a  position  to  deal  in  a  strictly 
scientific  manner  with  the  problems  of  normal  stature,  weight, 
chest  expansion,  pulse-rate,  and  other  elements  too  numerous 
to  be  here  referred  to.  The  tables  published  by  the  Association 
of  Medical  Directors  and  re-arranged  by  Dr.  O.  H.  Rogers,  are 
an  admirable  indication  of  the  treasures  which  the  archives  of 
life  insurance  companies  yield  when  subjected  to  expert  tabu- 
lation and  critical  analysis.  For  the  needs  of  accurate  chest 
diagnosis  we  require  more  determining  data  than  are  at  present 
available  while  the  field  of  human  thermometry  as  applied  to 

10 


LIFE   INSURANCE    AS    A   SCIENCE 

life  insurance   selection  has   remained   almost  neglected  since 
Seguin  published  his  work  in  1876. 

The  larger  and  more  involved  problems  of  human  multipli- 
cation and  normal  increase,  the  marriage  rate,  fecundity  and 
sterility,  consanguinity,  race-mixture  and  intermarriage  are  all 
pending  questions,  toward  the  solution  of  which  insurance 
contributes  much  information  and  expert  talent.  All  that  is 
summed  up  in  the  problems  of  heredity,  both  direct  from 
parent  to  offspring  and  through  collateral  branches  of  the  family, 
is  of  the  utmost  importance  to  life  insurance  companies,  and  in 
time  the  vast  number  of  accurate  family  records  in  the  possession 
of  these  companies  as  a  part  of  the  application  for  insurance, 
supplemented  by  the  known  results  of  subsequent  mortality, 
with  certified  causes  of  death,  must  needs  add  much  of  value 
and  interest  to  the  future  development  and  practical  value  of 
biological  science.  Toward  the  problem  of  reproductive  selec- 
tion, so  admirably  set  forth  by  Karl  Pearson,  life  insurance  can 
contribute  much  valuable  information,  particularly  on  the  point 
of  the  effect  of  the  age  of  the  parents  at  the  time  of  the  appli- 
cant's birth  on  the  subsequent  chances  of  his  death. 

Insurance  Medicine. 

If  the  mathematical  basis  of  life  insurance  is  derived  from 
the  doctrine  of  probabilities,  the  medical  basis  is  derived  from 
pathology,  or  the  doctrine  of  diseases,  their  causes,  mode  of 
occurrence,  etc.  The  position  of  the  medical  director  is  of  equal 
fundamental  importance  in  the  administration  of  a  life  insurance 
company  to  the  position  of  the  actuary,  in  that  upon  the  medi- 
cal selection  of  risks  proposed  for  insurance  largely  depends  the 
subsequent  mortality  experience.  With  the  immense  develop- 
ment of  life  insurance  in  all  countries  has  gone  the  advancement 
of  insurance  medicine,  from  the  crude  methods  of  the  London 
Equitable  Society  in  1762,  when  a  health  certificate  was  required 
bearing  the  signatures  of  two  witnesses,  one  of  whom  had  to  be 
a  physician,  to  the  uniform  blank  for  medical  examiners  pro- 
posed a  few  years  ago  at  the  International  Congress  of  Medical 

II 


LIFE   INSURANCE   AS   A   SCIENCE 

Directors  at  Brussels.  To-day  there  are  few  general  prac- 
titioners who  have  not,  at  one  time  or  another,  rendered  services 
to  life  insurance  companies  in  the  examination  of  proposed  risks, 
and  the  number  of  physicians  regularly  employed  by  these 
companies  is  constantly  increasing. 

Insurance  medicine  has  a  large  and  valuable  literature  of 
its  own,  to  which  constant  additions  are  being  made  as  the 
result  of  special  researches  and  increasing  experience  in  a  vast 
field  with  rare  opportunities  for  the  development  of  expert  skill. 
The  highly  scientific  character  of  this  work  is  due,  in  a  large 
measure,  to  the  close  relation  of  cause  and  effect.  Errors  of 
judgment  in  physical  diagnosis,  or  the  omission  to  note  symptoms 
of  incipient  diseases,  are  certain  to  be  followed  by  an  unfavor- 
able mortality  experience.  While  errors  of  judgment  on  the  part 
of  the  general  practitioner  outside  of  hospitals  as  a  rule  remain 
unknown,  such  errors  on  the  part  of  the  medical  examiner 
are  a  matter  of  permanent  record  and  are  comparatively  easy 
to  discover. 

Science  of  Neurology. 

The  neurology  of  the  future  will  render  even  greater  service 
to  insurance  science  than  has  been  possible  in^  the  past.  Brain 
diseases,  as  a  class,  are  unquestionably  on  the  increase  in  this 
and  other  countries,  and  there  is  some  trustworthy  evidence  to 
support  the  view  that  insanity  is  increasing  at  a  perceptible 
rate  from  year  to  year.  No  extensive  statistical  investigation 
has  been  made  into  the  alleged  increase  in  insanity,  which  may 
be  attributed  to  the  complex  nature  of  the  problem,  the  difficulty 
of  exact  definition,  the  undefined  borderland  of  sanity  and 
insanity,  and  many  other  causes;  most  of  all,  however,  to  the 
confusing  effect  of  the  improvement  in  the  recovery-rate  and  the 
decreasing  death-rate  in  state  and  private  institutions.  Actu- 
arial skill  can  be  of  great  service  to  the  medical  profession  in 
determining  this  question  in  much  the  same  manner  as  in  the 
investigation  of  the  alleged  increase  in  cancer  by  the  emi- 
nent actuary,  Mr.  George  King,  cooperating  with  Dr.  Arthur 
Newsholme. 

za 


life  insurance  as  a  science 

Suicide. 

Suicide  may  also  properly  be  referred  to  here  as  one  of  the 
problems  of  neurology  and  one  of  great  importance  to  life 
insurance  companies.  Suicide  is  on  the  increase  in  this  and 
other  countries.  For  illustration,  in  American  cities  the  rate  per 
100,000  of  population  has  changed  from  12.0  during  1890  to  20.6 
during  1909.*  Qualified  investigations  into  the  probable  causes 
responsible  for  this  much-to-be-deplored  increase  in  self-murder 
would  be  of  considerable  financial  value  to  insurance  companies. 
Of  the  total  mortality  of  insured  males,  aged  forty-five  and  over, 
5.6  per  cent,  are  deaths  from  self-destruction,  and  the  financial 
loss  to  insurance  companies  is  of  much  larger  proportions  than 
is  generally  assumed  to  be  the  case.f 

Surgery  and  Gynecology. 

The  achievements  of  surgery  are  one  of  the  glories  of  modem 
civilization  and  of  both  direct  and  indirect  value  to  life  insur- 
ance in  making  for  an  improved  longevity  and  a  resulting 
increase  in  the  chances  of  a  healthy  life  following  a  successful 
surgical  operation.  Beginning  with  the  two  principal  factors — 
the  introduction  of  anesthetics  and  the  introduction  of  anti- 
septics— we  have  a  long  list  of  important  modern  discoveries  in 
surgical  methods  which  have  done  much  to  reduce  human 
mortality  and  do  away  with  needless  suffering. 

Gynecology  has  an  important  relation  to  insurance  science. 
Woman  as  an  insurance  risk  is  one  of  the  perplexing  problems 
in  life  insurance  practice.  In  most  of  the  mortality  tables  for 
the  general  population  women  at  nearly  all  ages  experience  a 
lower  death-rate  than  men,  and  the  tendency  would  seem  to  be 
toward  a  still  greater  difference    in    favor    of    women    in  the 


*  For  an  extended  discussion  of  the  suicide  rate  of  American  cities» 
with  observations  upon  many  interesting  aspects  of  suicide  in  its  rela- 
tion to  life  insurance,  see  the  annual  articles  by  the  writer  in  The  Spec- 
tator, New  York,  1 890-1910. 

t  Mortality  Statistics  of  the  Mutual  Life  Insurance  Company  of  New 
York,  1843  to  1898,  page  47.     New  York,  1900. 

13 


LIFE   INSURANCE    AS    A   SCIENCE 

future  under  modem  conditions  of  life.  In  contrast,  insured 
women  have  often  proved  a  loss  to  the  companies  on  account  of 
certain  subtle  elements  of  adverse  selection  not  readily  com- 
prehended or  allowed  for  in  the  medical  examination  of  women 
as  insurance  risks.  As  a  rule,  the  physical  examination  of 
women,  for  reasons  of  modesty  and  general  custom,  is  made 
with  less  care  than  in  the  case  of  men;  obscure  pelvic  diseases 
and  diseases  of  the  ovaries  and  uterus  often  exist,  but  they  are 
quite  concealed.  Many  other  facts  brought  out  by  extensive 
experience,  tend  to  complicate  the  matter,  and  all  companies, 
therefore,  exercise  great  caution  in  the  acceptance  of  women  as 
insurance  risks. 

Science  of  Pediatrics. 
During  the  past  thirty  years  the  chances  of  death  have 
undergone  a  material  modification,  and  in  most  civilized  countries 
the  general  death-rate  is  much  lower  to-day  than  it  was  during 
the  early  seventies.  This  improvement  in  human  longevity, 
however,  affects  almost  entirely  the  younger  ages  of  life  and  in 
particular  children  under  ten  years  of  age.  The  modem 
treatment  of  the  diseases  of  children,  or  the  science  of  pe- 
diatrics, combined  with  improved  measures  of  public  hygiene, 
has  resulted  in  a  great  saving  of  infant  life,  which  goes  far 
to  balance  the  general  decline  in  the  birth-rate.  Industrial 
insurance  companies  in  particular  are  affected  by  this  improve- 
ment, and  the  amounts  now  paid  at  ages  under  fifteen  for  a 
weekly  premium  of  five  cents  are  at  least  twenty  per  cent, 
greater  than  they  were  some  thirty-five  years  ago,  when  this 
method  of  family  insurance  was  first  introduced  into  the  United 
States  by  Mr.  John  F.  Dry  den.  There  are,  however,  general 
benefits  resulting  to  life  insurance  practice  as  a  whole  from  the 
gradual  diminution  of  a  needless  waste  of  infant  life.  A  healthier 
type  of  manhood  and  womanhood  must  develop  from  children 
free  from  the  after-effects  of  acute  infectious  diseases  so  extremely 
prevalent  in  the  past. 

14 


lipb  insurance  as  a  science 

Sanitary  Science. 

The  reduction  of  the  chances  of  death  is  primarily  the 
result  of  our  increasing  knowledge  of  the  causes  and  true  nature 
of  diseases,  the  conditions  favoring  a  high  or  low  death-rate, 
and  the  necessary  means  and  methods  for  their  effective  control. 
For  want  of  a  better  term  we  use  the  one  of  "sanitary  science," 
which  includes  both  preventive  medicine  and  public  health  admin- 
istration. As  a  first  requirement  it  was  necessary  to  perfect 
the  official  registration  of  deaths  and  the  medical  or  legal  certi- 
fication of  their  causes.  Vital  statistics  form  the  groundwork  of 
sanitary  science  as  it  has  been  developed  during  the  past  fifty 
years  in  all  civilized  countries.  The  history  of  disease  preven- 
tion, or  in  particular  epidemic  diseases,  has  a  large  literature  of 
its  own,  including  the  modem  laboratory  researches  which  have 
attained  to  a  high  degree  of  excellence.  The  great  work  of 
Creighton  on  Epidemics  in  Great  Britain  is  an  illustration  of 
what  is  required  for  our  own  country  before  medical  topography 
and  geographical  pathology  will  have  reached  the  high  position 
to  which  they  are  destined  in  due  course  of  time. 

Medical  Topography. 

The  American  life  insurance  companies  of  the  first  forty 
years  of  the  nineteenth  century  are  of  little  more  than  historic 
interest  to  us  at  the  present  time.  The  Pennsylvania  Company 
for  Insurances  on  Lives  and  Granting  Annuities,  the  Massachusetts 
Hospital,  the  New  York  Life  Insurance  and  Trust  Company, 
the  Baltimore  Life  Insurance  Company,  the  Girard  Life  Insur- 
ance and  Trust  Company,  the  Ohio  Life  and  Trust  Company, 
and  others,  transacted  but  comparatively  little  business,  so  that 
by  1850  it  is  estimated  only  about  thirty  thousand  life  insurance 
policies  were  in  force  in  the  United  States.  In  1843,  however, 
the  organization  of  the  Mutual  Life  marks  the  beginning  of  a 
distinct  period  of  life  insurance  history  which  extends  to  1875, 
when  industrial  insurance  was  introduced  by  the  Prudential. 
A  number  of  valuable  contributions  to  the  literature  of  public 
medicine  and  medical  topography  had  been  made,  and  it  grad- 

IS 


LIFE   INSURANCE   AS   A   SCIENCE 

ally  became  possible  to  obtain  a  more  correct  view  of  the  value 
of  human  life  in  the  different  sections  of  the  country.  Bills  of 
mortality  were  available  for  a  number  of  important  cities,  and 
Sybert,  in  his  Statistical  Annals  of  the  United  States,  published 
in  1808,  could  supplement  his  observations  by  two  life-tables 
calculated  for  the  use  of  the  Pennsylvania  Company  for  Insur- 
ances on  Lives  and  Granting  Annuities.  One  of  these  tables 
was  derived  from  the  records  of  the  Episcopal  Church,  the  other 
from  the  records  of  the  Philadelphia  Board  of  Health.  The 
gradual  development  of  public  medicine  is  exhibited  in  the 
volumes  of  the  Journal  of  Health,  the  first  of  which  was  issued 
in  1830.  Ten  years  later  a  valuable  report  on  the  Sickness  and 
Mortality  of  the  Army  of  the  United  States,  embracing  a 
period  of  twenty  years,  was  published  by  government  authority, 
which  contains  much  interesting  and  suggestive  information 
relative  to  the  health  of  different  sections.  This  valuable 
document  was  followed  by  the  classical  report  of  Shattuck 
on  the  Vital  Statistics  of  Boston  for  the  period  1810-1841. 
In  1842  Forry  brought  out  his  treatise  on  the  Climate  of  the 
United  States  and  its  Endemic  Influences,  which  still  retains 
its  position  as  a  work  of  great  value.  In  1845  Shattuck  sup- 
plemented his  earlier  work  by  a  Census  of  the  City  of  Boston, 
which  forms  the  first  comprehensive  statistical  account  of 
the  population  of  an  American  city.  Dawson  and  De  Saussure, 
in  1849,  published  their  Census  of  Charleston,  S.  C,  which 
included  observations  on  health,  mortality  and  insurance.  In  the 
same  year  the  first  report  of  the  Committee  on  Public  Hygiene  of 
the  American  Medical  Association  was  published,  which  contains 
much  valuable  information  on  the  medical  topography  of  the 
most  important  sections  of  the  North  and  South.  The  American 
edition  of  Tilt's  Elements  of  Health  was  pubUshed  in  1853  in 
Philadelphia,  a  book  admirably  arranged  for  the  use  of  the 
period,  with  special  reference  to  the  requirements  of  life  insur- 
ance companies.  In  1854  Drake  issued  his  medical  topography 
on  the  diseases  of  North  America,  with  special  reference  to  the 
Diseases  of  the   Interior  Valley,   unquestionably  the   greatest 

16 


LIFE   INSURANCE   AS   A  SCIENCE 

contribution  to  the  medical  topography  of  our  country  up  to 
that  time.  Following  Drake,  Blodget,  in  1857,  issued  his  well- 
known  treatise  on  the  climate  of  the  United  States,  which 
includes  a  valuable  chapter  on  medical  topography.  The 
scientific  interest  of  American  life  insurance  companies  in  the 
subject  of  human  mortality  is  made  evident  by  the  publication, 
in  1857,  of  a  Report  on  Vital  Statistics,  by  James  Wynne,  M.  D., 
to  the  Mutual  Life  Insurance  Company,  but  the  expenses  for 
which  were  shared  by  seventeen  other  companies,  including  all 
of  the  more  important  and  representative  institutions  of  the 
period. 

Longitude  and  Latitude. 

The  office  practice  of  the  early  American  life  insurance 
companies  during  the  fifties  was,  however,  in  a  large  measure 
determined  by  very  fragmentary  data.  Most  of  the  observa- 
tions and  conclusions  of  writers  of  the  period  on  medical  topog- 
raphy were  derived  from  extensive  travels,  carried  on  under 
great  difficulties  and  at  considerable  personal  exposure  to  the 
ill-health-producing  conditions  described.  The  general  appre- 
hension was  not  so  much  as  to  the  probable  unfavorable  experi- 
ence in  the  country  at  large  as  in  the  Southern  and  Far  Western 
sections.  The  general  apprehension  as  to  a  high  death-rate 
in  the  South  was  amply  supported  by  the  published  mortality 
statistics  of  New  Orleans,  Mobile,  and  Savannah,  and  many 
able  articles  in  the  Southern  medical  publications.  Dunglison, 
in  his  treatise  on  Human  Health,  one  of  the  first  works  on 
hygiene  published  in  this  country,  connects  the  science  of  public 
medicine  with  the  science  of  insurance  by  a  chapter  on  "Atmos- 
phere and  Locality."  An  Englishman  by  birth,  he  stated  that 
when  he  was  about  to  leave  Great  Britain  to  occupy  a  situation 
for  which  he  had  been  selected  in  the  University  of  Virginia, 
a  life  insurance  company  of  which  he  was  a  member  declined 
to  continue  the  insurance  unless  the  premium  was  doubled. 
Dunglison  wrote  that  this  requirement  compelled  him  to  sacrifice 
or  lapse  his  policy.  Many  of  the  assumptions  with  regard  to 
health  in  Southern  latitudes  were,  however,  largely  exaggerated. 

17 


LIFE   INSURANCE   AS   A   SCIENCE 

Dunglison's  treatise  did  much  to  correct  erroneous  views, 
though  on  the  whole  a  regard  for  truth  compelled  the  author 
to  admit  the  extensive  prevalence  of  health-destructive  con- 
ditions which  it  required  time  and  an  infinite  amount  of  human 
labor  to  change  for  the  better.  Even  at  this  early  period,  how- 
ever, it  could  be  said  with  much  truth  that  within  the  last  century 
the  value  of  life  had  increased  progressively  and  was  rapidly 
improving,  but  as  long  as  the  primitive  conditions  of  pioneer 
life  obtained  it  was  out  of  the  question  for  life  insurance  com- 
panies to  develop  their  business  on  a  large  scale,  especially  in 
the  Southern  and  Western  States.  Speaking  generally,  the 
slow  growth  of  American  life  insurance  during  the  first  half- 
century,  was  in  a  large  measure,  due  to  the  high  mortality, 
the  frequency  of  epidemic  diseases,  and  the  fragmentary  vital 
statistics  of  the  period.* 

The  selection  of  risks  for  insurance,  while  primarily  medical, 
takes  also  into  careful  consideration  certain  facts,  most  of  which 
may  be  included  under  the  general  term  ''environment."  These 
are  locality  of  residence,  housing,  occupation,  habits,  and  war, 
all  of  which  are  more  or  less  comprehended  in  the  department 
of  preventive  medicine  and  public  and  personal  hygiene. 

Psychology. 
The  immense  development  of  modern  life  insurance,  which 
has  now  become  almost  a  universal  provident  institution,  is  pri- 
marily the  result  of  the  insurance  education  of  the  public  through 
the  solicitor  or  life  insurance  agent.  Psychology  alone  explains 
the  mental  processes  by  which  so  abstract  an  idea  as  the  theory 
\  of  risk  and  insurance  is  reduced  to  "insurance  consciousness" 
and  made  operative  on  conduct.  It  is  not  necessary,  in  fact  it  is 
not  desirable,  because  tending  to  confusion  of  thought,  that  the 
abstract  idea  or  even  the  business  methods  of  insurance  should  be 

*  Among  the  important  contributions  to  the  sanitary  history  of  this 
period  are  Fenner's  Southern  Medical  Reports,  Vols,  I  and  II,  New 
Orieans,  La.,  1849  ^^^  1850.  See  also  the  writer's  essay  on  Life  Insur- 
ance in  the  South  Before  the  War,  in  "  The  South  in  the  Building  of 
the  Nation,"  Richmond,  Va.,  1910. 

18 


LIFE   INSURANCE   AS   A   SCIENCE 

comprehended  by  the  appHcant  for  insurance  protection,  any 
more  than  we  require  to  know  the  chemical  analysis  of  food- 
stuffs and  the   processes  of  their  manufacture  to  enjoy  and 
digest  our  daily  meal.     What  is  required  is  education  in  the  "j 
simple  elements  of  insurance  protection,  emphasized  by  intelli-  L 
gent  suggestion  and  an  effective  appeal  to  the  emotions.    What'"^ 
the    prospective    policy-holder    needs    to    know    is  the  actual  / 
expense  of  risk  transference,  the  amount  of  insurance  provided  i 
in  the  event  of  certain  contingencies,  and  the  special  contract  j 
provisions  of  the  policy,  which  form  the  legal  basis  of  the  rela-i 
tion  of  the  insured  to  the  company. 

The  principles  of  risk  and  insurance  are  of  too  abstract  a 
nature  to  be  comprehended  by  the  average  mind,  even  after  a 
considerable  amount  of  intelligent  explanation.    The  elements  of - 
insurance  practice  and  results,  however,  are  readily  within  the 
mental  grasp  of  all  but  a  small  proportion  of  the  public,  and 
while  in  consequence  of  the  enormous  development  of  the  busi- 
ness there  exists  a  vague  general  consciousness  of  the  insurance      / 
idea,  it  is  but  imperfectly  understood  and  not  sufficiently  oper-    / 
ative  on  conduct.    We  are  taught  by  psychology  that  "an  object  / 
must   be  seen  many  times   before   it    is   rightly  seen,"  and  the 
abstract  idea  of  insurance  does  not  become  concrete  and  operative    / 
on  conduct  until  it  has  been  emphasized  and  re-emphasized  by  / 
the  insurance  instructor,  who  is  called  the  agent  or  solicitor. 
The  immense  success  of  industrial  insurance,  with  now  more  than  t|       ?*j 
sixty  million  policy-holders  in  the  world,  is  due  largely  to  the   |  V  ^    \ 
simplicity  of  the  idea  itself — so  much  to  be  paid  each  week —    \    "  f^^^^ 
so  much  receivable  in  the  event  of  death — which  is  readily 
within  the  mental  grasp  of  all  the  people.   In  the  more  complex 
form  of  ordinary  life  insurance,  especially  when  combined  with 
investment,  as  in  the  case  of  endowments,  the  process  of  insur- 
ance education  is  much  more  difficult  and  results  are  secured 
more  slowly.     What  is  true  of  the  progress  of  life  at  large  is 
equally  true  of  the  progress  of  insurance,  that  "the  adjustment 
of  inner  tendencies  to  outer  persistencies  must  begin  with  the 
simple  and  advance  to  the  complex,  seeing  that  both  within 

19 


V 


LIFE   INSURANCE   AS   A   SCIENCE 

and  without  complex  relations,  being  made  up  of  simple  ones 
cannot  be  established  before  simple  ones  have  been  established." 

The  Psychology  of  Suggestion. 
Abnormal  psychology  has  already  been  briefly  referred  to 
under  neurology.  The  psychology  of  suggestion  in  its  special 
relation  to  the  occurrence  of  mental  epidemics  is  of  considerable 
interest  to  life  insurance  companies.  The  present-day  frequency 
of  self-destruction  and  the  unquestionable  effect  of  suggestion 
in  causing  small  epidemics  of  suicide  of  a  local  character  is  a 
source  of  considerable  anxiety  to  the  management  of  conservative 
insurance  companies.  What  is  summed  up  in  a  dissertation  on 
The  Wonders  of  Human  Folly  explains  the  need  from  time  to 
time  to  recur  to  the  experience  of  the  past  for  an  explanation 
of  the  experiences  and  occurrences  of  the  present.  Mackay's 
Memoirs  of  Popular  Delusions,  for  illustration,  throw  much  light 
upon  recent  experiences,  and  it  has  been  said  by  him  with  much 
truth  that  while  "time  and  progress  have  changed  the  mani- 
festation, the  spirit  of  ancient  folly  lingers  still.  .  .  .  From  time  to 
time  the  infatuation  to  acquire  wealth  speedily  by  an  illegitimate 
shifting  of  the  cards  rather  than  by  safe  and  equitable  methods 
in  the  employment  of  capital  and  labor,  seizes  the  people;  and 
thus  probably  it  will  ever  be  until  those  who  possess  property 
shall  be  acquainted  with  the  principles  and  laws  of  trade  and 
shall  at  the  same  time  be  desirous  to  restore  to  the  commer- 
cial character  generally  an  inviolate  and  inflexible  spirit  of 
single-minded  honesty." 

Anthropology  and  Anthropometry. 

In  the  selection  of  risks  for  insurance  it  is  necessary  to 
take  into  consideration  certain  broad  principles  of  anthropology, 
in  particular  the  primary  distinction  of  race,  or  the  varieties  of 
mankind.  Even  the  most  cursory  inquiry  reveals  important 
differences  between  the  longevity  of  different  races  and  peoples 
which  no  conservative  insurance  company  can  prudently  ignore. 
"  The   physical   peculiarities   and  geographical   distribution   of 

20 


LIFE   INSURANCE   AS   A   SCIENCE 

the  human  family,"  wrote  Pickering,  **  form  one  of  the  most 
interesting  problems  in  history";  and  in  the  words  of  Darwin, 
"There  is  no  doubt  that  the  various  races,  when  carefully  com- 
pared and  measured,  differ  much  from  each  other."  Unfortu- 
nately, most  of  the  earlier  anthropologists  took  more  interest 
in  speculations  as  to  the  unity  or  plurality  of  the  human  species 
than  in  determining  types  of  mankind  by  careful  and  extensive 
measurements  and  observations  of  physical,  psychological,  and 
pathological  characteristics. 

Quetelet,  to  whom  insurance  owes  much  light  on  the  theory 
of  probability,  was  also  the  author  of  valuable  works  on  normal 
man  and  anthropometry,  which  have  done  much  to  suggest  the 
more  recent  investigations.  The  methods  of  Quetelet,  as  to 
both  measurement  and  description,  were  followed  to  advantage 
in  the  more  elaborate  works  of  Beddoe,  Roberts,  Gould,  Baxter, 
and  many  others.  We  are  nearer  to  the  truth  to-day  than  we 
have  been,  but  are  yet  far  from  having  the  required  data  for  a 
practical  anthropology  or  science  of  man  applicable  to  the 
solution  of  pending  problems  of  insurance. 

Geographical  Pathology. 

Every  advance  in  geography  and  the  more  accurate  mapping 
of  the  surface  of  the  earth  contributes  to  the  science  of  insur- 
ance. Medical  topography  and  geographical  pathology  depend 
primarily  upon  accurate  topographic  surveys,  and  the  immense 
advances  which  have  been  made  in  this  direction  during  the 
past  twenty  years  have  been  of  great  value  to  insurance  science. 
The  geographical  distribution  of  disease  is  receiving  more  and 
more  the  intelligent  consideration  of  the  geographers  of  to-day. 
As  an  admirable  illustration  of  what  in  time  may  develop  into 
a  distinct  science,  mention  may  be  made  of  Haviland's  work  on 
the  Geographical  Distribution  of  Disease  in  Great  Britain.  Even 
the  very  early  American  geographers  recognized  the  relation 
of  physiographic  and  climatic  conditions  to  health  and 
mortality,  and  Guthrie,  for  example,  in  his  geography  published 
in  1795,  refers  to  the  subject  at  some  length.    Darby,  following 

21 


LIFE   INSURANCE   AS- A   SCIENCE 

Guthrie,  contributed  valuable  observations  in  his  various 
writings,  particularly  in  his  View  of  the  United  States,  published 
in  1828,  and  in  his  Geographical  Description  of  Louisiana,  pub- 
lished in  1 81 6.  The  ultimate  tendencies  of  geographical  science 
in  this  particular  direction  are  best  illustrated  in  the  Appendix  of 
Maps  to  the  Report  of  Sir  H.  H.  Johnston,  as  Special  Commis- 
sioner on  the  Protectorate  of  Uganda.  These  maps  illustrate 
with  exceptional  clearness  the  average  altitude  and  the  salubrity 
of  each  district,  and  it  is  not  going  too  far  to  say  that  we  have 
really  more  accurate  information  regarding  this  distant  section 
of  the  globe  than  we  have  for  many  sections  of  our  own  country. 
The  importance  to  insurance  companies  of  similar  investigations 
into  our  own  Southern  States,  and  in  particular  into  our  new 
possessions  in  tropical  countries,  cannot  be  overestimated.  The 
works  of  Sir  Henry  Johnston  illustrate  the  methods  to  be  followed 
and  the  practical  results  to  be  attained. 

Geology  and  Mining. 

It  is  hardly  practicable  to  separate  a  discussion  of  geology 
from  the  preceding  discussion  of  geography  in  its  relation  to 
insurance  science,  since  every  geographical  purvey  contributes 
to  the  development  of  the  science  of  physiography  by  the  mapping 
of  surface  geology  and  general  topography.  Areal  geology  often 
discloses  important  factors  of  soil  composition,  etc.,  which  have 
a  distinct  and  well-understood  relation  to  health  and  mortality; 
as,  for  illustration,  in  the  clay  formations  which  underlie  the 
Gulf  coast  of  southeastern  Texas,  and  which,  in  a  large  measure, 
are  responsible  for  some  perplexing  sanitary  problems  at  Houston 
and  Beaumont.  The  comparatively  recent  development  of  scien- 
tific soil  surveys  may  here  be  referred  to,  for  many  of  the  reports 
which  have  been  published  emphasize  important  points  in  med- 
ical topography.  Of  special  interest,  for  illustration,  are  the 
reports  for  portions  of  the  Yazoo  Delta  and  the  Gulf  parishes 
of  Louisiana.  In  addition,  these  reports  usually  contain  a  careful 
analysis  of  the  elements  of  climate  and  other  matters  of  interest 
and  value  to  life  insurance  companies. 

22 


LIFE    INSURANCE    AS    A   SCIENCE 

It  is,  however,  in  the  field  of  economic  geology,  and  the 
mineral  industries  and  mining,  that  life  insurance  companies 
have,  perhaps,  the  most  important  interest.  The  immense 
development  of  the  mineral  resources  of  the  earth  give  employ- 
ment to  a  vast  army  of  men  whose  occupations  are  almost  with- 
out exception  of  a  dangerous  or  unhealthful  nature.  Mining 
accidents  are  still  of  great  frequency,  and  the  present-day 
tendency  does  not  seem  to  be  toward  a  substantial  reduction 
in  the  rate.*  The  problem  of  miners'  phthisis  is  attracting  much 
attention,  especially  in  Utah  and  South  Africa,  where  excep- 
tional conditions  present  unusual  difficulties.  The  geological 
formation  of  coal  areas  determines  in  part  the  accident  frequency 
from  falls  of  roofs  and  gas  explosions.  The  mineral  composition 
of  rocks  has  a  direct  relation  to  the  frequency  of  industrial 
poisoning  in  the  milling  and  smelting  of  copper  and  other 
metalliferous  ores,  while  the  accident  liability  of  quarry  men 
depends  partly  upon  the  geologic  formation  of  the  strata  to 
be  removed. 

Meteorology. 

Meteorology  1  assume  to  include  both  climate  and  weather 
service.  The  field  is  immense,  for,  as  has  been  observed  by 
Montesquieu,  "  The  empire  of  climate  is  the  most  powerful  of 
all  empires,"  and  the  progress  made  by  meteorology  has  been 
a  material  gain  to  life  insurance  science.  The  normal  climate 
of  any  given  locality  is  a  factor  of  great  importance  in  deter- 
mining health  and  longevity.  The  elements  of  temperature, 
barometric  pressures,  humidity,  rainfall,  prevailing  winds,  etc., 
are  of  considerable  determining  value,  but  as  yet  we  have  not 
the  required  standards  by  which  accurately  to  measure  the 
effects  of  these  elements  on  human  health  under  the  varying 
conditions  met  with  in  different  portions  of  the  globe.  We  still 
speak  of  the  "deadly  climate"  of  the  west  coast  of  Africa  or  of 
French  Guiana,  with  not  much  better  knowledge  of  the  facts 

*  See  Bulletin  No.  90,  Bureau  of  Labor,  Sept.,  1910,  Washington, 
D.  C,  for  a  full  discussion,  by  the  writer,  of  the  frequency  and  causes 
of  fatal  accidents  in  coal  mining  in  North  America. 

23 


LIFE   INSURANCE   AS    A   SCIENCE 

than  when  these  expressions  first  came  into  use,  under  entirely 
different  conditions  of  attempted  settlement  or  colonization. 
While  the  climate  and  weather  of  India  are  the  same  to-day 
as  at  the  time  of  the  Great  East  India  Company,  the  mortality 
of  European  troops  has  been  reduced  from  seventy-six  to 
sixteen  per  thousand.  While  it  may  be  true,  as  Ripley  holds, 
that  "the  English  of  to-day  are  no  nearer  to  true  acclimatiza- 
tion in  India  than  they  were  in  1840,"  there  can  be  no  doubt 
that  a  more  perfect  knowledge  of  the  elements  of  tropical 
climates  and  the  resulting  tropical  hygiene  have  done  much 
toward  the  ultimate  solution  of  the  white  man's  conquest  of 
the  tropics.* 

Industrial  Technology. 

The  applied  sciences  can  only  be  discussed  here  in  the  most 
general  way.  All  improvements  in  processes  and  methods  of 
manufacture,  as  a  rule,  benefit  the  workmen  by  incidental  im- 
provements in  the  sanitary  condition  of  factories  and  workshops. 
The  increasing  proportion  of  risks  written  by  life  insurance 
companies  on  the  lives  of  persons  employed  in  manufacturing 
industries  points  to  the  importance  of  all  improvements  in  indus- 
trial hygiene  and  their  resulting  relation  to  the  diseases  of 
occupations.  The  improvements  in  the  processes  of  manufacture 
imply,  as  a  general  rule,  a  decreasing  amount  of  waste  in  the 
form  of  dust,  vapor,  or  gases,  many  of  which  are  of  a  health- 
injurious  character.  The  utilization  of  waste  products,  on  the 
other  hand,  has  led  to  new  industries,  many  of  which  are  inju- 
rious to  health  and  life.  The  consolidation  of  industries  in  the 
form  of  industrial  combinations  or  trusts,  primarily  for  the 
purpose  of  effecting  economies,  has  done  much  to  improve 
sanitary  conditions  by  providing  new  and  larger  factories  with 
more  light  and  better  ventilation,  so  that  it  is  safe  to  say  that 
since  the  introduction  of  the  factory  system  the  average  work- 
man has  never  been  employed  under  healthier  conditions  than  at 

♦An  important  contribution  to  the  subject  is  "  Effects  of  Tropical 
Light  on  White  Men,"  by  Major  Charles  E.  Woodruff,  M.  D.,  New- 
York,  1905. 

24 


LIFE   INSURANCE   AS   A   SCIENCE 

the  present  time.  To  insurance  companies  the  problems  involved 
in  industrial  technology  are,  however,  extremely  complex  and 
a  never-ending  source  of  anxiety.  For  illustration,  the  rela- 
tively new  process  of  pulp  manufacture  is  carried  on  by  three 
distinct  methods,  the  mechanical,  the  soda,  and  the  sulphide, 
each  of  which  represents  different  conditions  affecting  health 
and  longevity,  which  require  to  be  taken  into  account  in  the 
acceptance  of  this  class  of  risks.  In  electrical  engineering  the 
truly  astonishing  progress  which  has  been  made  during  the 
past  few  years  has  resulted  in  entirely  new  conditions,  which 
no  prudent  company  can  safely  ignore.  As  an  illustration, 
mention  may  be  made  of  the  introduction  of  electricity  into 
mines  which  has  been  the  subject  of  an  official  inquiry  in 
England  and  by  state  mine  inspectors  in  this  country.  The 
enormous  development  of  electrical  industries  in  general  has 
resulted  in  entirely  new  conditions,  which  cannot  be  fully 
understood  in  the  light  of  past  experience.  Mining  engineering, 
perhaps  most  of  all,  requires  serious  consideration,  and  among 
other  new  factors  affecting  health  and  longevity,  is  the 
extensive  introduction  of  coal-cutting  machinery  into  the 
bituminous  coal  mines  of  our  Western  States.  In  ore-milling 
and  smelting  new  processes  are  constantly  supplanting  old 
methods,  and  here  again  present-day  practices  cannot  be 
determined  by  past  experience.  As  an  illustration  of  the  bene- 
fits to  health  arising  from  the  utilization  of  waste  products 
reference  may  be  made  to  the  modern  appliances  in  smelters 
by  which  many  of  the  health-injurious  vapors  and  gases  are 
converted  into  profitable  by-products.* 

Legal  Science. 

The  general  conception  of  insurance  law  limits  this  term 
to  the  settlement  of  legal  difficulties  arising  from  the  con- 
tractual relations  of  the  company  and  the  policy-holder.  Most  of 
the  books  which  essay  upon  the  subject,  from  Park  and  Marshall 

*  In  this  connection  Census  Bulletin  No.  190,  June  16,  1902,  on  "  Utili- 
zation of  Wastes  and  By-Products  "  may  be  consulted  to  advantage. 

25 


LIFE   INSURANCE   AS   A   SCIENCE 

to  the  latest  digest  and  dissertation,  treat  of  insurance  law  in 
this  narrow  and  restricted  sense.  We  have  not  as  yet  a  com- 
prehensive work  which  includes  the  relation  of  the  companies 
to  the  state  and  public  policy  in  addition  to  the  relations  at  law 
of  the  company  to  its  policy-holders  and  agents.  The  brief 
consideration  which  I  can  give  to  this  subject  precludes  proper 
treatment  of  so  complex  a  relation  as  that  of  insurance  to 
legal  science,  and  at  best  I  can  only  indicate  the  more  import- 
ant results  of  law,  jurisprudence,  and  social  regulations  affecting 
insurance  interests. 

Under  modern  conditions  the  conduct  of  a  life  insurance 
business  is  beyond  the  reach  of  individual  or  private  enter- 
prise. It  is  to-day  an  accepted  principle  of  government  that 
\  "life  insurance  is  a  business  of  so  sacred  a  character,  and  involv- 
j  ing  issues  so  important  to  the  national  welfare  of  each  country, 
that  it  must  be  the  subject  of  special  legislation  in  order  to 
safeguard  the  interests  of  the  insured.  ...  It  is  their  savings  in 
the  shape  of  premiums  and  their  accumulations  which  con- 
stitute almost  the  entire  resources  of  every  life  insurance  com- 
pany, and  it  cannot  be  a  subject  of  unconcern  to  any  government 
that  its  citizens  should  have  made  provision  for  the  future  to  so 
large  an  extent,  and  that  the  security  for  the  eventual  payment 
of  the  sums  assured,  as  they  mature,  should  be  guaranteed  by 
the  solvency  and  sound  investments  of  the  companies  that 
underwrite  the  contracts.  "  Insurance  companies  derive  their 
existence  from  charters  specially  granted,  but  in  conformity 
to  the  general  corporation  laws  of  the  different  states.  Corpo- 
rations are  by  law  endowed  with  perpetual  succession,  or,  in 
other  words,  are  artificial  persons  having  no  necessary  or 
natural  term  of  life,  and  they  may  be  regarded  as  an  exten- 
sion of  individual  capacity.  The  earlier  charters  of  American 
insurance  companies  illustrate  the  crude  ideas  regarding  the  busi- 
ness of  life  insurance  at  a  time  when  the  term  "insurance,"  in  the 
words  of  Park,  was  practically  equivalent  to  "marine  insurance." 
Almost  from  the  beginning  of  the  business  of  insurance  the 
importance  and  necessity  of  some  form  of  state  supervision  was 

26 


LIFE   INSURANCE   AS   A  SCIENCE 

recognized,  and  we  meet  with  the  inception  of  the  present  form 
of  state  supervision  in  a  Massachusetts  statute  of  1827,  which 
required  the  companies  to  report  annually  as  to  the  condition 
of  their  business.  The  growth  of  the  business  and  the  extension 
of  operations  to  other  states  developed  the  present  system  of 
state  supervision,  which  had  its  origin  in  a  law  passed  by  the 
legislature  of  Massachusetts,  establishing  a  separate  depart- 
ment for  the  supervision  of  insurance  interests,  in  1855.  To-day 
such  departments  exist  in  every  state  and  territory,  with  more 
or  less  comprehensive  powers  for  supervision  and  control.  The 
resulting  problems  are  of  most  serious  concern  to  the  companies. 

State  Supervision  of  Insurance. 

The  insurance  laws  of  the  different  states  are  often  widely 
at  variance  with  one  another.  The  remark  of  Mr.  Griggs, 
ex- Attorney  General  of  the  United  States,  that  while  **the 
interpretation  of  the  law  is  a  science,  law-making  is  not," 
applies  with  special  force  to  the  insurance  legislation  of  the  last 
thirty  years.  When,  in  1876,  Mr.  C.  C.  Hine  issued  his  volume 
on  Insurance  Statutes,  within  six  years  of  the  issue  of  a  similar 
work  by  Wolford,  he  could  truthfully  say  that  "the  insurance 
laws  of  five  years  ago  are  almost  obsolete,  and  in  their  stead 
new  statutes  have  come  upon  the  books  of  almost  every  state 
and  territory."  The  process  of  grinding  out  laws  has  gone  on 
with  undiminished  energy,  and  the  opinion  of  a  learned  judge 
that  "no  attorney  is  bound  to  know  all  the  laws"  may  give  some 
comfort  to  the  law  officers  of  insurance  companies  confronted 
by  the  problem  of  digesting  the  large  number  of  special  statutes 
passed  annually  or  biennially  by  forty-nine  different  states  and 
territories  for  the  ostensible  purpose  of  regulating  the  insurance 
business.  In  marked  contrast,  we  may  reflect  upon  English 
legislation  affecting  insurance  interests,  which  since  1870  has 
practically  remained  the  same*.  Mr.  Griggs,  in  his  address 
on  "Law-Making,"     properly   remarks    that    "history   of   the 

♦The  English  Assurance  Companies'  Act  of   1909  is  fully  discussed 
in  Chapter  VIII. 


LIFE   INSURANCE   AS   A   SCIENCE 

English  law  reveals  change  and  growth,  but  growth  by  slow 
and  deliberate  processes."  It  would  be  an  immense  step  in 
advance  towards  the  perfection  of  American  insurance  law  if 
a  similar  habit  of  mind  prevailed  in  this  country. 

The  taxation  of  life  insurance  companies  need  only  be  re- 
ferred to  here  as  an  important  problem  of  insurance  company 
administration.  If  it  is  the  duty  of  the  state  to  encourage  thrift 
or  efforts  on  the  part  of  the  people  toward  economic  independence 
and  a  secure  position  above  the  need  of  state  aid,  it  is  certainly 
a  paradox  to  meet  with  an  increasing  tendency  to  tax  life 
insurance  policy-holders  out  of  a  relatively  large  share  of  their 
annual  savings.  In  many  countries  other  than  the  United  States 
insurance  is  supervised  and  regulated  by  some  central  au- 
thority— in  England  by  the  Board  of  Trade,  in  France  by  the 
Minister  of  Commerce,  etc.  There  must  come  a  time  when 
the  burden,  expense,  and  annoyances  incident  to  supervision  by 
some  forty-nine  different  insurance  commissioners  of  states  and 
territories  will  become  intolerable  and  some  form  of  federal 
supervision  must  be  the  result. 

International  Law. 

An  increasing  number  of  life  and  fire  insurance  companies 
are  extending  their  fields  of  business  operations  to  foreign  coun- 
tries, and  in  a  few  cases  American  life  companies  transact  busi- 
ness in  most  of  the  civilized  countries  of  the  earth.  Without 
wishing  to  underrate  the  ratio  of  progress  made  by  life  insurance 
companies  of  other  countries,  it  is  generally  conceded  that  the 
American  life  insurance  companies  abroad  are  more  aggressive, 
and  as  a  rule  attain  more  readily  to  a  commanding  position 
than  the  home  companies.  As  a  result,  there  is,  at  first,  much 
local  antagonism  to  foreign  insurance  companies,  to  which, 
in  part,  at  least,  must  be  attributed  the  burdensome  regula- 
tions which  have  been  imposed  in  certain  countries  upon 
American  insurance  companies.  On  the  other  hand,  there  can 
be  no  doubt  that  during  the  past  quarter  of  a  century  the 
tendency  has  been  politically  and  socially  to  draw  states  together 

28 


LIFE   INSURANCE   AS   A   SCIENCE 

by  the  strong  attraction  of  "common  political  sentiments, 
common  aspirations  and  common  interests  of  a  permanent 
kind."  Insurance  may  rightly  claim  to  be  one  of  the  forces 
making  for  international  harmony  and  good  will. 

Contract  Law. 

All  insurance  is  in  the  nature  of  a  contract  between  the 
company  and  the  insured,  who  is  usually  referred  to  as  the 
policyholder.  The  policy  is  the  instrument  which  defines  the 
respective  rights  and  duties  of  the  contracting  parties,  who  are 
assumed  to  be  aware  of  the  fact  at  law  that  "a  contract  is  a 
deliberate  engagement  between  competent  parties,  upon  a  legal 
consideration,  to  do,  or  to  abstain  from  doing,  some  act."  Out 
of  the  contractual  relation  and  its  unavoidable  disputes,  mis- 
understandings, etc.,  has  resulted  a  mass  of  litigation  and 
court  decisions  usually  comprehended  under  the  term  **  insur- 
ance law."  A  retrospect  over  the  many  years  since,  in  i6oi,  the 
"Court  of  Insurance"  was  established  by  Queen  Elizabeth, and 
the  sixty-odd  cases  tried  during  its  entire  history,  to  the  present 
time  would  carry  me  far  beyond  the  present  purpose.  Suffice 
it  to  say  that  the  development  of  insurance  law  has  gone  for- 
ward with  the  growth  of  the  business  until  this  term  now  com- 
prehends a  variety  of  subjects  unknown  and  unthought  of  at 
the  time  when  Park  and  Marshall  first  published  their  works, 
about  a  century  ago.  Considering  the  enormous  extent  and 
highly  complex  character  of  the  insurance  business,  it  is  a  matter 
of  surprise  to  find  that,  after  all,  the  amount  of  litigation  should 
have  been  so  small.  The  tendency  has  been  constantly  towards 
a  contract  free  from  restrictions  likely  to  lead  to  litigation,  until 
the  life  insurance  policy  of  to-day  is  practically  a  promise  to 
pay  a  certain  sum  on  the  occurrence  of  a  given  event,  except  in 
the  case  of  fraud.  There  has  always  been  an  unfortunate  dis- 
position on  the  part  of  the  courts  to  construe  a  policy  of  in- 
surance more  upon  the  grounds  of  sentiment  than  upon  the  com- 
mon law  of  contract  and  fraud.  Mr.  Davies,  the  eminent  solicitor 
of  the  Mutual  Life,  has  discoursed  upon  this  matter  in  so  able 

29 


LIFE   INSURANCE   AS   A   SCIENCE 

and  interesting  a  manner  that  I  take  the  Hberty  of  quoting  to 
some  extent  from  his  lectures  on  the  law  of  life  insurance: 

"A  suit  upon  a  life  policy  is  an  especially  difficult  one  to 
defend  for  several  reasons.  In  the  first  place,  there  exists  in 
this  country  a  very  general  prejudice  against  corporations, 
which  inclines  a  jury  to  view  with  favor  any  claim  by  an  indi- 
vidual against  one  of  them.  Then  the  plaintiff  is  usually  a 
widow  or  some  other  dependent  of  the  deceased,  and  the  contrast 
is  strongly  drawn  by  the  counsel  arguendo  between  her  poverty 
and  the  heaped-up  millions  of  the  defendant,  the  corresponding 
liabilities  of  the  latter  being  carefully  kept  in  the  background. 
.  .  .  And  to  these  considerations  must  be  added  another  of  a 
much  higher  character,  that  natural  human  instinct  which  leads 
us  all  to  speak  well,  and  endeavor  to  think  well,  of  the  dead.  The 
fall  of  the  curtain  upon  a  human  life  covers  at  the  same  time 
his  faults  and  vices,  and  adds  enormously  to  the  difficulty  of 
establishing  to  the  satisfaction  of  a  jury  facts  which  are  notorious, 
but  which  blacken  his  memory.  The  very  neighbors,  who  during 
a  man's  life  denounce  him  as  a  worthless  sot,  will,  when  called 
as  witnesses  in  a  suit  upon  a  policy  on  his  life,  reluctantly  admit 
that  he  perhaps  on  rare  occasions  drank  to  excess,  but  not  to 
an  extent  to  impair  his  usefulness  or  affect  his  health.  So 
when  a  suicide  takes  place  the  associates  of  the  deceased  at  once 
begin  to  think  that  they  had  previously  noticed  symptoms  of 
aberration  of  the  mind,  quite  sufficient  to  justify  a  strong  sus- 
picion of  his  sanity,  although  no  such  idea  had  ever  occurred  to 
them  before  the  catastrophe." 

The  Law  of  Agency. 

The  life  insurance  agent  is,  as  a  rule,  an  appointed  employee 
of  the  company  and  under  contract  to  perform  certain  services 
in  return  for  a  stipulated  compensation.  The  employment  of 
agents  is  so  universal  that  but  few  policies  are  obtained  other- 
wise than  through  these  representatives  of  the  company.  Out 
of  this  condition  some  very  important  legal  questions  and 
problems  have  arisen,  aside  from  the  occasional  difficulties  and 
misunderstandings  between  the  company  and  its  employees. 
The  agent,  as  a  rule,  is  the  only  personal  representative  known 
to  the  insured,  and  the  agent's  position  is  thus  one  of  very  con- 
siderable responsibility  and  importance.    The  company  naturally 

30 


LIFE   INSURANCE   AS   A   SCIENCE 

aims  at  a  narrow  limitation  of  the  agent's  powers  as  to  the  issue 
or  modification  of  the  contract  between  the  company  and  the 
insured,  and  most  of  the  poHcies  issued  contain  a  clause  to  the 
effect  that  **no  condition,  provision,  or  privilege  of  this  policy- 
can  be  waived  or  modified  in  any  case,  except  by  an  indorse- 
ment signed  by  an  executive  officer  of  the  company." 

Insurance  and  Public  Policy. 

Insurance  in  its  relation  to  public  policy  presents  some  very 
interesting  problems  of  law  and  jurisprudence.  A  policy  of 
insurance  is  issued  upon  the  faith  of  the  statements  made  in 
the  application  for  insurance,  and  the  applicant  is  required  to 
warrant  the  truth  of  his  statements.  The  effect  of  warranty  is 
to  insure  the  accuracy  of  the  state  of  affairs  alleged  in  it ;  and 
consequently  the  greatest  care  in  making  a  declaration  of  them 
is  requisite.  There  has  been  a  considerable  amount  of  litigation 
and  resulting  decisions  of  the  courts  on  the  question  of  conceal- 
ment and  misrepresentation,  but  as  a  rule  the  decisions  have 
been  in  favor  of  the  insured.  It  should  be  manifest  that  it  is 
contrary  to  public  policy  to  encourage  fraud,  concealment,  and 
misrepresentation,  by  means  of  which  insurance  is  obtained 
under  conditions  which  would  have  precluded  the  issue  of  the 
policy  had  the  facts  been  truthfully  stated  to  the  company. 
A  common  form  of  misrepresentation  is  as  to  the  present  state 
of  health  of  the  insured,  particularly  in  cases  where  even  the 
most  advanced  methods  of  medical  diagnosis  cannot  establish 
with  entire  accuracy  the  facts  at  the  time  the  application  for 
insurance  is  made.  Losses  thus  sustained  by  the  companies  are 
to  the  injury  and  disadvantage  of  the  honest  policyholder,  and 
by  this  much  the  true  progress  of  the  business  is  retarded.  A 
strict  construction  of  the  statute  of  frauds  is,  therefore,  one  of 
the  most  certain  means  of  advancing  life  insurance  interests. 

Insurance  Economics. 

The  economic  theory  of  risk  and  insurance  has  only  received 
incidental    consideration  by  writers    on    economics  and  social 

31 


LIFE   INSURANCE   AS   A  SCIENCE 

problems,  with  the  notable  exceptions  of  Willett  and  Macleod. 
This  is  unfortunate,  for  insurance,  in  one  way  or  another,  reacts 
upon  the  whole  economic  life  of  the  people,  and  there  is  no  hope 
of  a  rational  political  economy  until  all  the  elements  of  social 
and  economic  progress  are  taken  into  account.  The  economic 
value  and  utility  of  insurance  are  important  and  proper  subjects 
of  economic  inquiry,  and  the  immense  progress  of  the  business 
demands  the  impartial  and  critical  consideration  of  qualified 
experts  in  economic  and  social  science.  The  view  of  Macleod 
that  "annuities  or  rights  to  receive  a  series  of  future  pay- 
ments "  are  negative  economic  quantities,  under  which  term 
he  comprehends  all  instruments  of  credit,  shares  in  commercial 
companies,  policies  of  insurance  of  different  kinds,  etc.,  does 
not  seem  to  have  been  accepted  by  other  writers  on  economic 
theory. 

The  earlier  writers  on  the  investments  of  the  working  class 
gave  considerable  attention  to  life  insurance  and  its  relation  to 
the  general  welfare.  Gregg,  among  others,  wrote  in  185 1,  or 
three  years  before  the  practical  beginnings  of  industrial  insur- 
ance in  England,  that  "life  insurance  policies  offer  one  of  the 
most  important  channels  of  investment  for  the  savings  of  all 
classes" ;  and  he  adds,  "  Of  all  modes  of  employing  small  savings, 
there  is  none  which  we  should  so  earnestly  desire  to  become 
general  among  workingmen;  none  which  appears  to  us  so  de- 
serving of  the  fostering  care  of  the  legislature;  none  which,  if 
universal  and  habitual,  would  do  so  much  to  diminish  those 
cases  of  utter  and  helpless  destitution  which  press  so  heavily 
on  the  resources  of  the  community  in  the  shape  of  poor-rates, 
and  which  are  the  fruitful  parents  of  a  long  progeny  of  calamity 
and  crime."* 

The  progress  of  insurance  since  this  was  written  challenges 
the  admiration  of  the  world.      In  the   United   Kingdom  the 


*  A  most  interesting  investigation  into  the  subject  of  savings  of  the 
poor  is  contained  in  a  Parliamentary  Report  on  "  Savings  of  the  Middle 
and  Working  Classes,"  ordered  by  the  House  of  Commons,  to  be  printed, 
July  5,  1850. 

32 


LIFE    INSURANCE    AS    A   SCIENCE 

industrial  companies  alone,  excluding  collecting  and  other 
friendly  societies,  have  now  some  thirty  million  policies  in  force 
on  the  lives  of  workingmen  and  their  families.  The  question 
raised  by  Prof.  Falkner  as  to  whether  "the  growth  of  insurance 
in  recent  years  has  been  mainly  among  the  well-to-do,"  can  be 
emphatically  answered  in  the  negative.  In  fact,  life  insurance, 
almost  from  its  inception,  has  met  with  greater  appreciation 
among  those  who,  for  want  of  a  better  term,  we  speak  of  as  the 
working  class.  This  aspect  of  the  business  is  one  of  economic 
history  rather  than  theory,  but  here  again  we  find  that,  with 
few  exceptions,  writers  on  the  progress  of  economic  and  social 
institutions  have  made  little  of  a  fact  which  is  none  the  less  of 
profound   economic  importance   and   significance. »/ 

Insurance  History. 

The  study  of  insurance  history  and  the  history  of  asso- 
ciations, gilds,  and  friendly  societies,  is  a  most  instructive 
chapter  in  economics.  Far  back  into  ancient  history  careful 
students  of  commerce  and  navigation  have  traced  at  least  a 
semblance  of  our  present  form  of  marine  insurance.  Anderson's 
History  of  Commerce  contains  some  very  suggestive  illustra- 
tions of  a  possible  connection  of  present-day  methods  to  those 
of  an  earlier  and  almost  forgotten  time.  Turner,  in  his  History 
of  the  Anglo  Saxons,  and  Eden,  in  his  State  of  the  Poor,  throw 
much  light  on  primitive  methods  of  solving  social  problems  in 
conformity  to  the  principles  of  association.  Walford,  in  his 
work  on  Gilds,  and  Toulmin  Smith,  in  his  great  work  on  English 
Gilds,  with  the  introduction  by  Brentano,  are  indispensable 
sources  of  information  to  the  student  who  would  rightly  under- 
stand the  foundations  upon  which  the  present  massive  structure 
of  insurance  rests. 

But  other  materials  of  great  value  are  readily  available  to 
the  student  of  insurance  and  economic  history.  The  great  work 
of  Walford,  unhappily  not  completed  beyond  the  letter  H  in  the 
Insurance  Cyclopaedia,  published  between  187 1  and  1880,  is  a 
monumental  work  of  human  industry  and  learning.    Of  more 

33 


LIFE   INSURANCE   AS   A   SCIENCE 

recent  works  on  insurance  history  mention  may  be  made  of 
Martin's  History  of  Lloyds  and  Marine  Insurance  in  Great  Britain, 
published  in  1876;  the  century  History  of  the  Insurance  Com- 
pany of  North  America,  published  in  1885;  the  semi-centennial 
History  of  the  New  York  Life  Insurance  Company,  published 
in  1896;  the  quarter-century  History  of  the  National  Fire 
Insurance  Company  of  Hartford,  published  in  1897;  the  century 
History  of  the  Norwich  Union  Fire  Society,  published  in  1898; 
the  History  of  the  Prudential  Insurance  Company  of  America, 
published  in  1900,  and  finally  the  half-century  History  of  the 
Springfield  Fire  and  Marine  Insurance  Company,  published  in 
1 90 1.  I  must  also  not  fail  to  mention  a  reprint  of  Documents 
Relating  to  the  Early  History  of  the  Scottish  Widow's  Fund 
and  Life  Assurance  Society,  published  in  1901.  The  student 
of  economic  history  and  economic  institutions  will  find  much 
of  value  in  these  volumes  which  will  aid  him  towards  a  more 
correct  interpretation  of  the  factors  which  have  made  for  social 
progress  during  the  nineteenth  century. 

Insurance  as  an  Element  of  Commerce. 

Any  effort  to  trace  the  origin  and  growth  of  insurance  must 
necessarily  take  into  account  the  development  of  navigation 
and  commerce  during  the  last  three  hundred  years.  Evidence 
is  not  wanting  that  even  among  the  nations  of  antiquity  marine 
insurance  in  some  form  or  other  was  not  wholly  unknown.  Park 
and  others  have  traced  the  beginnings  of  marine  insurance  to 
very  early  periods,  but  it  has  remained  for  the  last  three  cen- 
turies to  develop  the  system  to  its  present  state  of  universal 
utility.  Even  the  most  casual  study  of  the  history  of  navigation 
and  commerce  reveals  the  immense  advantages  resulting  from 
the  practice  of  marine  and  fire  insurance.  In  the  words  of 
McCulloch:  "Without  the  aid  that  it  affords,  comparatively 
few  individuals  would  be  found  disposed  to  expose  their  property 
to  the  risk  of  long  and  hazardous  voyages;  but  by  its  means 
insecurity  is  changed  for  security  and  the  capital  of  the  merchant 
whose  ships  are  dispersed  over  every  sea  and  exposed  to  all 

34 


LIFE   INSURANCE    AS   A   SCIENCE 

the  perils  of  the  ocean  is  as  secure  as  that  of  the  agricultural 
risk.  He  can  combine  his  measures  and  arrange  his  plans 
as  if  they  could  no  longer  be  affected  by  accident.  He  has 
purchased  an  exemption  from  the  effects  of  such  casualties; 
and  applies  himself  to  the  prosecution  of  his  business  with  that 
confidence  and  energy  which  nothing  but  a  feeling  of  security 
can  inspire." 

The  principle  of  insurance  in  its  appHcation  to  commerce 
is,  however,  no  longer  limited  to  marine  and  fire  insurance.  The 
last  fifty  years  have  seen  the  practical  development  of  the 
insurance  idea  in  various  other  directions,  of  which  I  may 
mention  the  following:  Accident,  health,  and  employers'  liability 
insurance;  fidelity,  surety,  bond,  mortgage,  and  title  insurance; 
plate-glass,  elevator,  and  boiler  insurance;  hail,  windstorm,  and 
tornado  insurance;  and  finally,  live-stock  and  burglary  insur- 
ance. All  of  these  have  assumed  the  character  of  instruments 
of  commerce  and  are  in  theory  and  fact  an  indispensable  element 
of  the  commercial  development  of  the  present  age. 

Modern  Tendencies. 

The  present-day  tendency  to  industrial  organization  and 
the  combination  of  capital  is  reflected  in  the  status  of  the  insur- 
ance business  of  the  United  States,  which  has  followed  the  gen- 
eral commercial  trend  of  the  age.  Of  the  ordinary  life  insurance 
business,  six  companies  have  fifty-six  per  cent,  of  the  total 
insurance  in  force;  of  the  industrial  business,  ninety-three 
per  cent,  of  the  policies  are  with  three  of  the  companies 
transacting  this  form  of  insurance;  and  of  fraternal  insurance, 
so-called,  forty  per  cent,  of  the  membership  is  in  five  of 
the  principal  organizations.  The  resulting  gain  has  been  very 
considerable,  especially  in  the  direction  of  enhancing  the  general 
security  of  the  business  and  public  confidence  in  this  form  of 
individual  and  family  protection.  This  tendency  has  not  ope- 
rated injuriously  to  the  development  of  a  healthy  spirit  of 
competition,  which  may  be  illustrated  by  the  fact  that  there  are 
to-day  about  one  hundred  and  seventy  ordinary  and  twenty- 

3S 


LIFE  INSURANCE   AS   A  SCIENCE 

three*  industrial  insurance  companies  transacting  business  in 
the  United  States.  The  problem  of  wealth  and  its  distribution 
may  be  summed  up  in  the  statement  by  Thompson  that  "the 
property  of  the  most  numerous  class,  that  is,  the  poorest,  is 
coming  evermore  to  the  front  as  a  great  probleni  of  modem 
statesmanship."  Life  insurance  is  to-day  one  of  the  most  im- 
portant factors  in  the  re-distribution  of  wealth,  and  perhaps  of 
all  the  methods  the  most  equitable  and  effective.  It  reaches 
every  stratum  of  society  and  enables  the  poorest  to  provide  for 
the  future  a  sum  of  money  which  in  every  sense  of  the  word 
represents  capital  obtained  by  individual  efforts  as  the  result  of 
habitual  saving  and  prudent  self-denial.  The  insurance  com- 
panies collect  these  savings  in  small  amounts,  which  range  as 
low  as  three  cents  a  week,  or  assume  considerable  proportions 
per  annum;  the  accumulations  form  the  assets  of  the  companies 
and  as  such  they  become  available  for  profitable  investment  in 
productive  industries  and  trades;  they  are  redistributed  through 
payments  to  policyholders  as  claims  or  matured  endowments  or 
annuities,  in  sums  which  range  from  an  amount  sufficient  to  pay 
for  a  burial  to  returns  which  represent  a  considerable  fortune. 
As  Walter  Bagehot  said  some  years  ago,  /'People  insure  their 
lives  who  save  in  no  other  way, "and  the  vast  sums  accumulated 
by  life  insurance  companies,  now  nearly  four  billion  dollars, 
represent  an  amount  of  economic  security  and  evidence  of  an 
effective  adaptation  to  the  exigencies  of  modern  life  without  a 
parallel  in  economic  history. 

Transportation. 

The  field  of  insurance  is  primarily  the  city  and  surround- 
ing territory,  but  by  degrees  the  more  sparsely  populated 
sections  of  the  country  have  become  available  in  consequence 
of  the  development  of  the  science  of  transportation.  From 
92,000  miles  in  1880,  the  railway  system  of  the  United  States 
has  grown  to  over  250,000  miles  in   1909,   opening  immense 

*  Seventeen  of  the  Industrial  companies  also   transact  ordinary  in- 
surance. 

36 


LIFE   INSURANCE   AS   A   SCIENCE 

areas  to  settlement  and  leading  to  the  subsequent  development 
of  cities  and  towns,  which  necessarily  contribute  towards  the 
further  extension  of  every  form  of  insurance.  The  remark- 
able development  of  electric  railways  has  opened  large  sec- 
tions of  the  agricultural  regions  previously  outside  of  the  sphere 
of  profitable  business  operations.  Railway  and  navigation  com- 
panies employ  a  large  number  of  men  exposed  to  a  considerable 
accident  liability,  which  requires  special  consideration.  While 
great  improvements  have  been  made  in  railway  transporta- 
tion tending  to  diminish  the  mortality  from  fatal  accidents, 
especially  in  connection  with  the  coupling  and  uncoupling  of 
cars,  the  mortality  of  certain  classes  of  railway  employees 
remains  very  considerably  above  tbe  normal  of  men  of  corres- 
ponding age  employed  in  less  dangerous  occupations.  There 
has  not  been  the  reduction  in  the  death-rate  which  earlier 
discussions  and  the  passage  of  the  laws  relative  to  the  preven- 
tion of  accidents  seemed  to  warrant.  The  problem  remains 
one  of  serious  concern  to  insurance  companies  transacting  either 
a  life  or  accident  business,  or  both. 

In  still  another  direction  are  insurance  companies  interested 
in  transportation  science,  and  that  is  the  opportunities  for  safe 
and  profitable  investment  in  railway  bonds  and  mortgages. 
An  incidental  result  of  great  importance  has  been  the  opening 
of  new  agricultural  areas  with  a  corresponding  opportunity  for 
profitable  farm  loans,  which  are  perhaps  the  most  advantageous 
and  satisfactory  investment  of  insurance  companies,  if  made  with 
the  necessary  knowledge  of  local  conditions  of  soil  and  climate. 
There  is,  therefore,  abundant  evidence  of  the  close  relation  of 
the  science  of  transportation  to  the  science  of  insurance. 

Banking  and  Currency. 

Banking,  currency,  and  public  finance  are  fundamental 
factors  determining  insurance  progress.  With  more  than 
$3,500,000,000  of  assets  invested  in  interest-bearing  securities, 
the  companies  have  a  vital  stake  at  issue  in  all  questions  of 
sound  money,   a  stable  currency,   and  healthful  trade   condi- 

37 


LIFE   INSURANCE   AS   A  SCIENCE 

tions.  Of  the  assets  of  the  companies,  nearly  eighty-five  per 
cent,  are  securely  invested  in  bonds,  stocks,  and  mortgages, 
including  every  form  of  approved  federal,  state,  and  municipal 
indebtedness,  first-class  railroad  bonds,  farm  loans,  etc.  The 
necessity  of  earning  a  certain  rate  of  interest  demands  the 
most  experienced  judgment  in  making  these  investments  and 
a  watchful  eye  on  general  banking  and  trade  conditions.  All 
of  the  great  financial  reform  measures  by  which  this  country 
has  reached  its  pre-eminent  position  in  the  world's  money 
market — the  National  Banking  Act  of  1863,  the  resumption 
of  specie  payments  in  1878,  the  defeat  of  the  free  silver  craze 
in  1896  and  1900,  and,  finally,  the  passage  of  the  Gold  Stan- 
dard Act — have  contributed  to  the  progress  and  stability  of 
life  insurance  during  the  past  forty  years.  In  fact,  such  pro- 
gress would  have  been  out  of  the  question  as  long  as  there 
existed  "great  dissimilarity  in  the  laws  governing  banks  in 
the  several  states,  precluding  uniformity,  security,  and  safety." 
Hepburn  points  out  that,  in  1861,  "there  were  then  some 
7,000  kinds  of  denominations  of  notes  and  fully  4,000  spurious 
or  altered  varieties."  It  is  not  a  matter  of  surprise  that  under 
these  conditions,  between  1851  and  1 861,, the  actual  increase 
in  life  policies  in  force  should  only  have  been  about  30,600. 

But  the  influence  of  life  insurance  extends  to  every  aspect 
of  finance  and  trade.  With  its  necessarily  intimate  relation  to 
banks  and  trust  companies,  life  insurance  assumes  the  position 
of  a  regulating  medium  to  which  in  no  small  degree  may  be 
attributed  the  more  perfect  control  of  the  money  market  in 
hours  of  uncertainty  and  impending  financial  disaster.  If 
crises  and  depressions  are  today  a  more  remote  element  of 
business  probability,  and  if  this  is  due,  in  part  at  least,  to  "the 
greater  skill  and  prudence  exercised  by  bankers  as  the  result 
of  experience,"  I  do  not  go  too  far  when  I  hold  that  this  gain 
is  due  in  a  measure  to  the  fact  that  there  are  many  impor- 
tant banks  and  trust  companies  which  have  on  their  boards 
of  directors  one  or  more  men  who  are  also  officers  of  life  and 
other  insurance  companies.     Our  financial  history  of  the  past 

38 


LIFE   INSURANCE   AS   A   SCIENCE 

ten  years  shows  conclusively  the  influence  of  conservative  life 
insurance  finance  as  a  restraint  and  preventive  of  a  recurrence 
of  the  disastrous  series  of  panics  between  1825  and  1893. 

Social  Science. 

Sociology  and  social  science,  including  all  the  more  im- 
portant divisions,  is  so  comprehensive  a  term  as  to  preclude 
consideration  in  detail.  Social  structure  alone,  as  revealed  by 
the  census  and  other  statistical  investigations,  bears  a  more 
or  less  direct  relation  to  insurance  development  and  progress. 
Census  inquiries  are  now  made  with  more  skill  and  accuracy 
than  heretofore,  and  every  new  investigation  brings  out  new 
facts  and  tendencies  of  society  in  the  process  of  evolution 
from  homogeneity  to  heterogeneity.  The  mere  statistics  of 
past  and  present  population,  its  distribution  by  rural  and 
urban  communities,  its  composition  by  sex,  age,  color,  nativ- 
ity, and  occupation,  are  all  elements  of  a  determining  nature 
which  it  is  necessary  to  know  for  the  more  intelligent  control 
of  insurance  practice.  Without  an  accurate  knowledge  of  the 
population  and  its  distribution  by  age  and  sex,  no  life-tables 
could  be  worked  out  for  the  general  population,  and  without 
a  careful  analysis  of  the  facts  of  physical  and  social  environ- 
ment, no  definite  business  policy  could  be  established. 

Most  important  is  the  relation  of  insurance  to  the  family. 
Life  insurance  as  a  social  institution  primarily  contemplates 
the  certain  and  effective  protection  of  widows  and  orphans, 
or,  in  other  words,  an  extension  of  conjugal  duties  result- 
ing from  marriage  under  the  existing  conditions  of  modem 
life.  Many  of  the  earlier  insurance  companies  were,  in  fact, 
called  "Widows'  Schemes,"  or  "Widows'  and  Orphans'  Assur- 
ance Societies,"  or,  in  the  words  of  Price,  "Institutions  for  the 
Benefit  of  Widows."  The  biological  problems  resulting  from 
marriage  and  its  relation  to  insurance  are  of  much  importance, 
and  I  may  point  out  that  among  the  most  involved  calcula- 
tions of  insurance  practice  are  those  of  survivorship  in  marriage. 
Interesting  data  and  calculations  on  this  subject  are  to  be  found 

39 


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LIFE   INSURANCE   AS    A    SCIENCE 

among  other  sources  in  a  comprehensive  work  on  the  Madras 
Military  Fund,  which  includes  observations  on  the  mortality  of 
wives,  the  rate  of  mortality  and  re-marriage  among  widows, 
wives,  chance  of  widowhood,  etc.  Westermarck  has  contributed 
the  most  important  investigations  on  the  "  Statistics  of  Marriage" 
derived  from  Danish  data,  while  Westergaard  has  a  dis- 
cussion on  the  subject  in  his  treatise  on  Mortality  and  Mor- 
bidity, which,  unfortunately,  has  not  been  translated  into 
EngHsh. 

Considerations  of  the  chances  of  survivorship  in  marriage, 
the  well-established  lower  mortality  of  wives  as  compared  with 
husbands,  and  the  practical  certainty  of  surviving  children,  point 
to  life  insurance  as  the  most  effective  method  yet  devised  to 
prevent  suffering  and  dependence  upon  the  charity  of  others.  "A 
family,"  wrote  Professor  Sumner,  some  thirty  years  ago,  "is 
a  charge  which  is  capable  of  indefinite  development,"  and 
whatever  may  be  its  ultimate  evolution,  there  can  be  no  ques- 
tion but  that  life  insurance  acts  as  a  conserving  factor  in  human 
marriage  and  develops  the  altruistic  impulse  of  the  husband 
toward  the  wife  and  of  the  father  toward  the  children.  In  the 
homely  language  of  insurance  parlance:  "Wives  often  object 
to  insurance,  but  widows  never  do,"  and  I  may  add  the  glow- 
ing tribute  of  Gilbert  Currie,  one  of  the  earlier  writers  on  insur- 
ance, that  "if  we  only  could  call  from  the  dusty  archives  of 
these  venerable  institutions  the  huge  piles  of  molding  ledgers, 
and  extract  from  their  records,  what  tales  would  be  unfolded 
of  miseries  prevented,  griefs  and  sorrows  soothed,  the  briny 
tear  wiped  from  off  the  cheek,  the  balm  of  consolation  imparted, 
the  widow's  heart  made  to  rejoice  with  gladness,  and  the  help- 
less orphan  to  sing  for  joy!  This  is  no  flight  of  the  imagina- 
tion, no  picture  of  fancy,  no  figure  of  speech;  it  is  sober  reality, 
the  voice  of  experience,  and  the  simplicity  of  truth." 

Life  Insurance  and  Social  Reform. 

Of  the  problems  of  social  wellbeing  there  are  few  of  greater 
importance    than    the    development    of    voluntary    thrift    and 

40 


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y. 


LIFE   INSURANCE   AS   A   SCIENCE 


resulting  economic  freedom  of  the   masses.     What   Mill  calls 
*' self -regarding  actions"  and  "actions  which  are  not  primarily 
or  chiefly  self-regarding"  admirably  illustrates  the  fundamental 
difference   between   insurance   and   mere   saving   habits.      The 
hope  of  an  earlier  day  has  been  realized,  and  life  insurance  at      "? 
the  outset  of  the  twentieth  century  is  a  universal  provident 
institution.     The  view  prevails,  as  expressed  by  Marshall,  that 
**at  last  we  are  setting  ourselves  seriously  to  inquire  whether     / 
it  is  necessary  that  there  should  be  any  so-called  lower  class*/ 
at  all."    Life  insurance  precludes  the  necessity  of  abject  poverty  l!^;r 
and  pauperism.    Life  insurance  eliminates,  for  all  but  the  lowest 
and   most   depraved,   the   possibility  of  a   pauper  burial.      It 
has  placed  within  the  reach  of  the  large  majority  at  least  a    / 
temporary  barrier  between  death  and  dependence  and  the  poor-  V 
house.     We  are  still  far  from  having  reaHzed  all  that  is  implied 
in  the  insurance  idea  and  we  still  suffer  much  from  an  unsound 
social  philosophy.     We  are  constantly  in  danger  of  delusive 
schemes  of  social  reform  not  based  on  individual  effort  and 
voluntary   adaptation   to   existing  economic   conditions.      The 
tendency,   however,   I  believe,   is  in  the  right  direction,   and 
every  year  sees  an  advance  toward  a  higher  degree  of  social 
wellbeing.     Social  reform  of  the  right  kind  must  come  from  \ 
within;  must  be  the  result  of  individual  character  and  indi-  \ 
vidual  struggle.     This  is  the  social  aspect  of  insurance — that     / 
is,  prudently  to  economize,  to  save,  to  invest,  to  insure  for  the   ^ 
financial  protection  of  self  and  others  in  old  age  or  at  death. 
There  is  nothing  in  the  annals  of  the  poor  more  remarkable 
than  the  rise  and  progress  of  provident  institutions,  from  burial 
clubs  and  friendly  societies  to  the  different  varieties  of  life 
insurance   adapted   to   every  stratum  of  society.      For  wage- 
earners,  or  the  industrial  element  of  the  population,  industrial 
insurance  may  rightfully  claim  to  meet  the  requirements  of 
Currie  of  "its  being  such  a  system  as  the  circumstances  and 
conditions  imperatively  require,  namely,  the  provision  of  means 
whereby  they  are  enabled  to  help  themselves  and  their  families 
without  depending  upon  the  assistance  of  their  neighbors  or 

41 


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LIFE   INSURANCE   AS   A   SCIENCE 

compromising  in  the  smallest  degree  their  independence  of 
character."  I  may  also  quote  his  conclusion,  applicable  to 
the  conditions  of  today,  that  "every  poor  man  is  now  called 
/upon  to  fulfill  his  most  sacred  obligation,  an  obligation  as 
4  binding  upon  the  hard-working,  honest  man  as  upon  the  most 
opulent  individual,  parent,  or  husband  in  the  world — to  his 
wife  and  his  helpless  offspring."     It  is  the  mission,  the  aim, 

I  and  the  object  of  insurance,  primarily  and  chiefly,  to  diminish 
dependence  and  increase  by  individual  effort,  frugality,  and 
forethought  the  social  and  economic  independence  of  the  masses. 

Insurance  as  a  Career. 

While  insurance  may  rightfully  claim  recognition  as  a 
science,  as  a  business  pursuit  it  is  still  far  from  being  a  pro- 
fessional career.  The  general  aspect  of  insurance  as  a  career 
or  business  pursuit  has  been  discussed  in  much  detail  by  the 
Honorable  John  F.  Dry  den  in  a  paper  contributed  to  a  series 
of  articles  on  the  subject  to  the  New  York  Tribune.*  Of  late 
years  insurance  education  has  been  introduced  into  colleges  and 
universities,  sometimes  in  connection  with  general  instruction 
in  commerce  and  banking,  as,  for  illustration,  in  the  Wharton 
School  of  Finance,  University  of  Pennsylvania,  and  in  the 
University  of  Wisconsin;  or  occasionally  as  an  independent 
course  of  instruction,  as,  for  illustration,  at  Yale.  In  a  general 
way,  however,  it  is  yet  too  early  to  speak  of  insurance  educa- 
tion as  professional  training.  The  general  method  of  instruc- 
tion in  insurance  is  still  of  too  elementary  a  character,  the 
elements  of  success  in  office  and  field  administration  are  too 
ill-defined,  and  the  principles  of  business  conduct  are  too  far 
from  being  reduced  to  scientific  uniformity  to  permit  us  to 
speak  of  insurance  as  a  professional  career. 

But  as  a  business  pursuit  it  is  deserving  of  the  most  serious 
consideration,  and  I  may  repeat  the  glowing  tribute  to  the 
insurance  agent  by  Elizur  Wright  that  "among  the  honorable 

*  Reprinted  in  "  Addresses  and  Papers  on  Life  Insurance  and  Other 
Subjects,"  by  John  F.  Dryden,  Newark,  N.  J.,  1910. 


LIFE   INSURANCE   AS   A   SCIENCE 

workers  in  the  civilized  world  to  whom  the  public  as  well  as 
the  insured  will  die  indebted,  we  give  faithful  and  successful 
life  insurance  agents  a  high  place.  It  is  hardly  possible  to 
believe  that  a  life  insurance  agent  can  achieve  any  long  con- 
tinued success  without  bringing  into  action  some  of  the  noblest 
qualities  of  a  sterling  man,  and  no  field  that  we  know  of  is 
more  inviting  to  an  ambition  that  would  devote  the  best  of 
talents  to  the  benefit  of  society  at  large  and  individuals  in 
particular." 

Insurance  Libraries. 

A  pre-requisite  for  an  effective  university  education  is  the 
need  of  comprehensive  or  approximately  complete  insurance 
libraries.  All  of  the  more  important  companies  have  libraries 
of  more  or  less  extent  on  insurance,  statistics,  and  related 
sciences,  but  the  three  libraries  deserving  of  special  mention 
are  the  Walford  collection  of  the  Equitable  Assurance  Society, 
the  Bibliotheque  de  I'Utrecht,  and  the  library  of  the  Prudential 
Insurance  Company  of  America.  The  Prudential  library  of 
insurance  and  statistics  includes  over  25,000  volumes  and 
pamphlets,  supplemented  by  an  extensive  collection  of  data 
on  every  subject  relating  to  insurance  science.  The  Boston 
Insurance  Society  has  a  good  library,  of  which  a  catalogue  has 
been  published.  The  Life  Insurance  Company  of  Utrecht  has 
published  a  valuable  catalogue,  which  has  been  re-issued  in  a 
fifth  edition  in  1903.  No  comprehensive  bibliography  of  insur- 
ance exists,  but  Pocock,  in  1840,  published  a  small  volume, 
which  is  now  extremely  rare,  including  a  list  of  the  more  im- 
portant works  on  insurance,  the  doctrine  of  chances,  gambling, 
lotteries,  etc.,  which  had  been  printed  up  to  that  time.  The 
list,  however,  is  far  from  complete.  Probably  the  most  com- 
prehensive collection  of  works  on  insurance  and  related 
subjects  is  the  library  of  the  Institute  of  Actuaries  of  Great 
Britain. 

Religious  Aspects  of  Life  Insurance. 

The  relation  of  insurance  science  to  religious  agencies  and 
religious  influence,  both  individual  and  social,  is  implied  in  the 

43 


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LIFE   INSURANCE   AS   A   SCIENCE 

earlier  discussion  of  the  ethical  sanction  of  insurance  as  a 
method  of  social  amelioration.  Professor  Clark  has  well  said 
that  "certain  modern  religious  problems  need  to  be  appre- 
hended as  well  from  the  material  as  from  the  spiritual  side," 
and  of  these  life  insurance  has,  almost  from  its  inception,  re- 
ceived the  sanction  and  active  encouragement  of  the  Christian 
Church.  The  first  name  on  the  list  of  the  incorporators  of  the 
Amicable  Society  for  the  Insurance  of  Lives,  organized  in  1705, 
is  that  of  the  Bishop  of  Oxford.  The  first  comprehensive  and 
practical  work  on  life  insurance  theory  was  published  in  1762 
by  the  Rev.  Richard  Price,  a  Unitarian  clergyman.  Some  of 
the  earliest  works  on  annuities  and  reversions  developed  out 
of  considerations  of  the  value  of  church  leases  and  inquiries 
into  the  tenant  rights  of  church  and  other  foundations.  Some 
of  the  first  steps  in  the  direction  of  improving  the  tables  and 
premium  rates  of  burial  clubs  and  friendly  societies  were  made 
by  ministers  of  the  Established  Church,  and  I  may  mention 
the  Rev.  Mr.  Becher,  whose  works  are  still  valuable  for  instruc- 
tion and  reference.  It  has  been  for  many  years  the  practice 
in  England  to  organize  burial  clubs  and  insurance  societies  of 
children  of  Sunday-schools,  which,  as  far  as  I  know,  have 
served  and  continue  to  serve  a  useful  purpose.  The  first 
two  insurance  organizations  in  the  United  States,  one  of 
which  is  still  in  existence,  were  the  Presbyterian  Ministers 
Fund,  established  in  1759,  and  the  Society  for  Episcopal  Clergy- 
men, established  in  1769.  An  insurance  company  for  clergy- 
men has  been  in  existence  in  London  since  1846,  and  among 
the  efforts  of  the  Salvation  Army  is  an  Industrial  Insurance 
Department,  which  has  made  satisfactory  progress. 

These  illustrations  will  suffice  to  show  that  the  insurance 
idea  has  the  sanction  of  the  Church  and  religious  approval 
generally,  although  some  have  held  and  still  hold  that  "these 
institutions  are  conducted  on  a  principle  contrary  to  a  trust 
in  Providence."  In  answer  it  has  properly  been  argued  that 
"life  insurance  takes  its  rise  in  one  of  the  most  respected  features 
of  human  nature — foresight,  or  a  provision  against  contingent 

44. 


LIFE   INSURANCE   AS   A   SCIENCE 

evils ;  and  having  most  particularly  in  view  the  succor  of  the 
widows  and  fatherless,  it  is  essentially  a  moral  and  humane 
institution.  Life  insurance  should  not,  therefore,  be  considered 
as  an  interference  in  any  degree  with  the  course  of  Providence, 
which  some  rashly  assume  it  to  be,  but,  on  the  contrary,  the 
taking  advantage  of  a  means  kindly  offered  by  Providence  for 
our  benefit."  This  is  the  view  which  prevails  at  the  present 
time  and  which  gives  religious  as  well  as  moral  sanction  to 
the  development  of  life  insurance  as  a  universal  provident 
institution. 

Insurance  as  a  Science. 

As  a  comparatively  new  department  of  human  inquiry 
and  action,  insurance  found  no  place  in  the  earlier  classi- 
fications by  Bacon,  Comte,  and  Spencer,  but  no  scientist 
of  the  future  and  certainly  no  economist  can  rightly  ignore 
what,  in  time,  will  become  a  tremendous  force  making  for 
the  material  wellbeing  and  the  economic  independence  of  the  \ 
vast  majority  of  civilized  people  in  all  portions  of  the  earth.  1 
It  is  equally  certain  that  the  insurance  manager  of  the 
future  will  give  more  and  more  consideration  to  the  teachings 
of  both  the  abstract  and  concrete  sciences,  with  the  aim  to 
adjust  the  practical  administration  of  insurance  to  sound 
scientific  theory  derived  from  extensive  investigations  into  the 
vast  range  of  related  sciences.  For  the  future  conduct  of  the 
business  the  demand  will  be  for  trained  minds,  qualified  to 
deal  with  problems  more  complex  and  involved  than  the  prob- 
lems and  difficulties  of  the  past.  As  it  has  well  been  pointed 
out  by  the  Honorable  John  F.  Dry  den,  in  a  paper  on  *' Insur- 
ance as  a  Career:"  "In  a  general  way  it  may  be  said  that  the 
scientific  temperament  is  most  likely  to  lead  to  success  in  home 
office  administration,  for  scientific  training,  as  well  as  all  higher 
education,  distinctly  qualifies  a  man  for  administrative  re- 
sponsibility." 

Insurance  is  today  the  foremost  social  institution  of  civi- 
lized countries.  The  business  has  assumed  enormous  propor- 
tions, and  the  tendency  of  the  "insurance  idea"  is  toward  an 

45 


LIFE   INSURANCE   AS  A  SCIENCE 

ever-increasing  area  of  general  usefulness.  To  both  the  indi- 
vidual and  the  state,  insurance  is  today  an  indispensable  method 
and  means  for  the  maintenance  of  our  standard  of  social  security 
and  progress.  In  the  struggle  of  the  masses  for  economic  free- 
dom and  a  more  equitable  distribution  of  wealth,  insurance 
aids  and  sustains  all  other  forces  making  for  this  much-to-be- 
desired  end.  Insurance  in  its  final  analysis  is  simply  a  business 
method  to  make  the  world  a  better  place  to  live  in,  than  which 
no  aim  or  purpose  could  be  higher  or  more  worthy. 

LIST  OF  REFERENCES. 

I.  Report  from  the  Select  Committee  on  the  Laws  respecting  Friendly 
Societies,  ordered  by  the  House  of  Commons  to  be  printed,  July 
5th,  1825.     p.  8. 

a.  The  Economic  Theory  of  Risk  and  Insurance,  by  Allan  H.  Willett, 
New  York,  1901. 

3.  Principles  of  Political  Economy,  by  William  Roscher;  translated  by 

John  J.  Lalor,  New  York,  1878,  2nd  Vol.     (Book  IV,  Chap.  III.) 

4.  Jonathan  D5miond's  Essays  on  The  Principles  of  Morality,  New 

York,  1836.     p.  Ill  and  p.  117. 
$.     Wayland,  Essays  on  Moral  Science,     p.  248. 

6.  Insurance:    A  Practical  Exposition  for  the  Student  and  Business 

Man,  by  T.  E.  Young,  F.  R.  A.  S.,  London,  1906. 

7.  Investigations  in   the   Military  and   Anthropological   Statistics  of 

American  Soldiers,  by  B.  A.  Gould,  New  York,  1869. 

8.  Medical  Examination  for  Life  Insurance,  by  Chas.  Lyman  Greene, 

Phila.,  1900.     p.  125. 

9.  Medical  Thermometry  and   Himian  Temperature,  by  T.   Seguin, 

M.  D.,  New  York,  1876. 

10.  The  Chances  of  Death  and  other  Studies,  by  Karl  Pearson,  F.  R.  S., 

Vol.  I,  p.  63.     London,  1897. 

11.  A  View  of  the  Rise  and  Progress  of  the  Equitable  Society,  by  Wm. 

Morgan,  F.  R.  S.     London,  1828. 
13.     Address  on  the  Increase  of  Cancer,  by  Dr.  J.  F.  Payne;  published 
in  the  Transactions  of  the  Hunterian  Society.     London,  1899. 

13.  The  Suicide  Record  of  American  Cities  for  1906,  by  Frederick  L. 

Hoffman.     The  Spectator,  New  York,  1910. 

14.  Essay  by  John  F.  Dryden,  on  "The  Inception  and  Early  Problems 

of  Industrial  Insurance,"  The  Insurance  Monitor,  1903. 

15.  Elements  of  Vital  Statistics,  by  Arthur  Newsholme,  3rd  Edition 

London,  1899. 

46 


LIFE  INSURANCE   AS   A  SCIENCE 

1 6.  An  Address  from  the  President  and  Directors  of  the  Pennsylvania 

Company  for  Insurance  on  Lives  and  Granting  Annuities  to  the 
Inhabitants  of  the  U.  S.,  upon  the  subject  of  the  Beneficial 
Objects  of  that  Institution;  Phila.,  1814. 

17.  Proposals  of  the   Pennsylvania   Company  for  Insurance  of  Lives 

and  Granting  Annuities.     Phila.,  1837. 

18.  Proposals  of  the  Massachusetts  Hospital  Life  Insurance  Company, 

Boston,   1823. 

19.  Prospectus  of  the  Union  Insurance  Company,  incorporated  by  the 

Legislature  of  the  State  of  New  York,  for  Making  Insurances 

on  Lives  and  Granting  Annuities,  New  York,  1818. 
ao.     An  Act  to  Incorporate  the  New  York  Life  Insurance  and  Trust 

Company,  passed   March  9th,   1830;  including  Proposal  Forms, 

Premium  Rates,  etc. 
21.     Report  of  the  Trustees  of  the  New  York  Life  Insurance  and  Trust 

Company,  made  to  the  Chancellor  of  the  State  of  New  York, 

March  29tli,  1831. 
33.     Answer  and  Report  in  the  Matter  of  the  New  York  Life  Insurance 

and  Trust  Company  in  Chancery  before  the  Chancellor,  March, 

1834. 
33.     Answer  and  Report  in  the  Matter  of  the  New  York  Life  Insurance 

and  Trust  Company  in  Chancery  before  the  Chancellor,  March, 

1846. 
24.     Address  on  Life  Insurance  in  the  United  States,  Hunt's  Merchant 

Magazine,  February  and  March,  1843. 
35.     Practical  Remarks  on  the  Present  State  of  Life  Insurance  in  the 

United  States,  by  Harvey  G.  Tuckett,  Phila.,  1850. 
26.     Lectures  on  the  Science  of  Life  Insurance,  by  Moses  L.   Knapp, 

M.  D.,  Phila.,  1853. 
37.     Life  Insurance,  its  Nature,  Origin  and  Progress,  by  Chas.  B.  Norton, 

New  York,  1852. 
88.     Baltimore  Life  Insurance  Company,  Proposals,  Rates,  etc.,  Balto., 

1836. 
39.     Statistical  Annals  of  the  United  States  of  America,  by  Adam  Sey- 

bert,  M.  D.,  Phila.,  181 8. 

30.  The  Journal  of  Health,  Vol.  I,  Phila.,  1830. 

31.  The  Climate  of  the  United  States  and  its  Endemic  Influences,  by 

Samuel  Forry,  M.  D.,  2nd  Edition,  New  York,  1842. 

32.  The    Vital    Statistics   of    Boston,    by    Lemuel    Shattuck,    Phila., 

1841. 

33.  Statistical  Report  on  the  Sickness  and  Mortality  of  the  Army  of 

the  United  States,  by  Thomas  Lawson,  M.  D.,  Washington,  1840. 

34.  Census  of  Boston,  1845,  hy  Lemuel  Shattuck,  Boston,  1846. 


LIFE   INSURANCE   AS   A   SCIENCE 

35.  Census  of  the  City  of  Charleston,  S.  C,  for  the  year  1848,  by  J.  L. 

Dawson,  M.  D.,  and  H.  W.  DeSassure,  M.  D.     Charleston,  S.  C, 
1849- 

36.  First  Report  of  the  Committee  on  Public  Hygiene  of  the  American 

Medical  Association,  Phila.,  1849. 

37.  Elements  of  Health,  by  E.  J.  Tilt,  M.  D.,  Phila.,  1853. 

38.  A  Systematic  Treatise  on  the   Diseases  of  the   Interior  Valley  of 

North  America,  by  Daniel  Drake,  M.  D.,  Vol.  I,  Cincinnati,  1850; 
Vol.  II,  Phila.,  1854. 

39.  Climatology  of   the  United  States,  by  Lorin  Blodget,  Phila.,  1857. 

40.  Report  on  the  Vital  Statistics  of  the  United  States,  made  for  the 

Mutual  Life  Ins.  Co.  of  New  York,  by  James  Wynne,  M.  D.,  New 
York,  1857. 

41.  Human  Health,  by  Robley  Dunglison,  M.  D.,  Phila.,  1844. 

42.  The  Wonders  of  Human  Folly,  in  Chamber's  Essays  for  the  People, 

Vol.  VIII,  p.  63,  London,  1854. 

43.  Memoirs  of  Extraordinary  Popular  Delusions,  by  Charles  Mackay, 

a  Vols.,  3rd  Edition,  London,  1856. 

44.  The  Races  of  Man  and  Their  Geographical  Distribution,  by  Chas. 

Pickering,  M.  D.,  London,  1851. 

45.  The  Calculation  of  Probabilities,  by  M.  A.  Quetelet,  English  edition, 

London,  1849. 

46.  An  Essay  on  Probabilities  and  their  Application  to  Life  Contingen- 

cies, by  Augustus  DeMorgan,  London,  1838. 

47.  Statistics,   Medical  and   Anthropological,  of  the   U.   S.   Army,  by 

J.  H.  Baxter,  M.  D.,  2nd  Vol.,  Washington,  1875. 

48.  The    Geographical    Distribution   of    Disease   in   Great   Britain,   by 

Alfred  Haviland,  London,  1892. 

49.  The  Geography  of   Disease,  by  Frank  G.   Clemow,   M.   D.,   Cam- 

bridge, England,  1903, 

50.  New  Travels  in  the  U.  S.,  as  performed  in  1788,  by  J.  P.  Brissot 

de  Warville,  New  York,  1797. 

(Contains  comparative  tables  of  the  probability  of  life  in  New 
England  and  Europe.) 

51.  View  of  the  United  States,  by  William  Darby,  Phila.,  1828. 

52.  British  Central  Africa,  by  Sir  Harry  H.  Johnston,  K.  C.  B.,  New 

York,  1897. 

53.  Annual  Reports  of  the  Bureau  of  Soils,  Department  of  Agriculture, 

Washington,  D.  C,  1899-190 7. 

54.  Fatal  Accidents  in  Coal  Mining,  Annual  Review  in  the  Engineering 

and  Mining  Journal,  1900-1910,  by  Frederick  L.  Hoffman. 

55.  The  Races  of  Europe,  by  Wm.  Z.  Ripley,  Ph.  D.,  New  York,  1899. 

48 


LIFE  INSURANCE   AS   A  SCIENCE 

56.  Climate  and  Health  in  Tropical  Countries,  by  G.  M.  Giles,  F.  R. 

C.  S.,  New  York,  1905. 

57.  Decennial  Supplements  to  the  Reports  of  the  Registrar-General  of 

England  and  Wales  on  Occupation  Mortality,  last  issue  pub- 
lished in  1908.     (Parliamentary  Report.) 

58.  Outlines  of  Industrial  Chemistry,  by  Frank  Hall  Thorp,  Ph.   D., 

New  York,  1899. 

59.  Handbook  of  Industrial  Organic  Chemistry,  by  Samuel  P.  Sadtler, 

Phila.,  1908. 

60.  Report  of  the  Departmental  Committee  on  the  Use  of  Electricity 

in  Mines,  London,  1904. 

61.  Drapers'  Company  Research  Memoirs,  Studies  in  National  Deteriora- 

tion: (a)  a  first  study  of  the  statistics  of  Pulmonary  Tubercu- 
losis, by  Karl  Pearson,  London,  1907;  (b)  a  second  study  of  the 
statistics  of  Pulmonary  Tuberculosis:  Marital  Infection,  by  the 
late  Ernest  G.  Pope  and  others,  London,  1908;  (c)  a  third  study 
of  the  statistics  of  Pulmonary  Tuberculosis,  the  Mortality  of  the 
Tuberculous  and  Sanatorium  Treatment,  by  Elderton  and  Perry, 
London,  1910;  (d)  On  the  Inheritance  of  the  Diatheses  of  Phthisis 
and  Insanity,  by  Charles  Goring,  M.  D.,  London,  1909,  all  pub- 
lished by  Dulau  and  Company,  37  Soho  Square,  W.,  London. 

62.  Anthropometry   and    Physical    Examinations,    by   J.    W.    Seaver, 

New  Haven,  Conn.,  1896. 

63.  A  Manual  of  Physical  Measurements,  by  Wm.  W.  Hastings,  Spring- 

field, Mass.,  1902. 

64.  Ethnography  of  India,  by  H.   H.   Risley,   Census  of  India,    1901, 

Calcutta,  1903. 

65.  Report  of  the  Royal  Commission  on  the  Decline  of  the  Birth  Rate 

of  New  South  Wales,  2  vols.,  Sydney,  N.  S.  W.,  1904. 

66.  On  Stethometry,  by  Arthur  Ransome,  London,  1876. 

67.  The  Grammar  of  Science,  by  ICarl  Pearson,  London,  1900. 

68.  The    Philosophical  Works  of   Francis   Bacon,    London,    1905,    pp. 

409—4 1 2 . 

69.  Principles  of   Science,   by  Wm.    Stanley  Jevons,  Vol.  2,   London, 

1 87 1,  Chap.  XXX. 

70.  The  Nature  of  Man,  by  Elie  Metchnikoff,  New  York,  1903. 

71.  Natural  Inheritance,  by  Francis  Galton,  London,  1889. 

72.  Essays,  Scientific,  Political  and   Speculative,  by  Herbert    Spencer, 

New  York,  1896,  Vol.  2,  p.  74. 


CHAPTER  II 
INSURANCE  ECONOMICS. 

The  place  of  insurance  in  economics  has  never  been  clearly 
and  finally  determined  by  recognized  authorities  on  the  sub- 
ject. By  far  the  most  ambitious  attempt  in  this  field  of  research 
is  the  valuable  monograph  by  Allan  H.  Willett,  but  this  author 
considered  the  subject  almost  entirely  from  the  theoretical 
point  of  view,  with  only  slight  regard  to  the  actual  practice 
of  insurance  in  everyday  life.  The  importance  of  insurance 
as  an  element  of  commerce  and  its  far  reaching  influence  on 
national  and  international  commercial  development  would  alone 
be  sufficient  to  establish  the  necessity  for  a  qualified  inquiry 
to  determine  the  place  of  insurance  in  economic  science.  The 
important  relation,  however,  in  which  all  forms  of  insurance 
stand  to  social  progress  at  large  require?  that  this  branch  of 
science  should  receive  more  attention  from  trained  economists 
in  the  future  than  has  been  the  case  in  the  past.  Evidently 
insurance  is  an  important  factor  in  production,  for  the  cost 
of  producing  goods  for  sale  must  be  materially  diminished  by 
insurance  through  the  distribution  of  risks  since  the  cost  would 
necessarily  be  greater  if  the  whole  risk  had  to  be  assumed  by  the 
producer.  It  is  equally  evident  that  insurance  is  an  important 
factor  in  distribution  because  the  cost  of  transportation  must  be 
less  where  the  risk  of  loss  or  destruction  is  distributed  through 
insurance  than  where  the  whole  risk  has  to  be  assumed  by 
either  the  shipper  or  the  agency  engaged  in  transportation.  It 
is  very  difficult  indeed  to  conceive  of  commerce  being  carried 
on  without  insurance  and  the  present  high  degree  of  security 
in  practically  all  commercial  transactions  is,  to  a  considerable 
extent,  the  result  of  the  distribution  of  risks  through  insurance. 

SO 


INSURANpE   ECONOMICS 

Commercial  credit  itself  is  very  largely  based  upon  msurance, 
without  which  there  would  be  no  security  for  full  or  partial 
recovery  in  the  event  of  total  or  partial  loss  through  fire,  ship- 
wreck, or  other  destructive  agencies.  Credit  insurance  as  such 
has  become  an  important  branch  of  trade  and  the  whole  system 
of  loans  and  advances  on  goods  in  storage,  or  in  course  of  trans- 
portation, would  be  impossible  were  it  not  for  the  protection 
granted  by  policies  of  insurance. 

What  is  true  of  production  and  distribution  is  also  true 
of  consumption,  and  the  final  price  of  every  article  in  com- 
merce is  more  or  less  governed  by  insurance  even  though  the 
true  incidence  of  the  insurance  premium  in  the  price  of  a 
multitude  of  articles  can  not  be  traced  with  absolute  certainty 
on  account  of  the  minute  fraction  of  the  cost  involved.  By 
aggregating  insurance  premiums,  however,  an  enormous  amount 
of  extra  commercial  security  is  created  which  is  nothing  more 
nor  less  than  the  complete  assumption  of  commercial  risks  in 
all  its  phases,  and  from  every  point  of  view,  through  the  modem 
institution  of  insurance  corporations.  There  is,  thus,  some 
evidence,  at  least  available  to  prove  that  insurance  is  more  or 
less  a  factor  in  the  three  main  branches  of  economics — that  is, 
production,  distribution  and  consumption,  but  as  yet  no  trained 
economist  has  concerned  himself  with  the  actual  facts  of  insur- 
ance experience  to  trace  this  element  with  scientific  accuracy 
through  all  the  ramifications  of  economic  science. 

It  is,  however,  a  distinctly  helpful  sign  of  an  awakening 
economic  interest  in  this  important  question  that  so  high  an 
authority  on  economic  subjects  as  Mr.  J.  A.  Hobson  should 
have  included  insurance  in  a  separate  chapter  in  his  recently 
published  treatise  on  the  Industrial  System,  being  an  inquiry 
into  earned  and  unearned  incomes  from  a  modern  point  of 
view  and  with  a  due  regard  to  modem  conditions  of  life.  Equally 
extended  and  qualified  consideration  has  been  given  to  insur- 
ance by  Prof.  Irving  Fisher  in  his  treatise  on  The  Nature  of 
Capital  and  Income,  published  a  few  years  previous  to  the 
work  of  Hobson,  and  both  of  these  contributions  may  be  said  to 

SI 


INSURANCE   ECONOMICS 

mark,  in  outline  at  least,  the  probable  trend  of  future  thought 
in  formulating  more  definite  conceptions  of  the  place  of  insur- 
ance in  economic  science. 

Discussion  op  Insurance  in  the  Wealth  of  Nations. 
From  the  time  when  Adam  Smith  published  his  Wealth 
of  Nations,  insurance  has  been  referred  to  by  economic  writers 
and  some  of  these  references  are  of  historic  interest  if  not  of 
particular  value  in  present-day  discussions  of  this  important 
subject.  At  the  outset  of  every  discussion  of  insurance  it  is 
of  importance  to  clearly  realize  the  fundamental  difference 
between  insurance  and  gambling,  a  distinction  which,  unfor- 
tunately, is  often  lost  sight  of  even  by  otherwise  qualified 
writers  on  the  subject.  Gambling,  as  emphasized  in  the  dis- 
cussion on  lotteries  by  Adam  Smith,  is  never  a  complete  dis- 
tribution of  risk,  for  as  he  observes,  "There  is  not,  however,  a 
more  certain  proposition  in  mathematics,  than  that  the  more 
tickets  you  adventure  upon,  the  more  likely  you  are  to  be  a 
loser,"  for,  he  continues,  "Adventure  upon  all  the  tickets  in 
the  lottery,  and  you  lose  for  certain ;  and  the  greater  the  number 
of  your  tickets,  the  nearer  you  approach-  to  this  certainty." 
This  is  the  fundamental  antithesis  to  insurance,  which  distri- 
butes an  existing  risk  with  a  fair  degree  of  approximation  to 
the  interests  of  each  risk-taker,  who  in  return  for  a  small  pre- 
mium secures  complete  or  partial  compensation  for  loss.  Smith, 
in  his  discussion  of  wages  and  profits,  remarks,  "That  the 
chance  of  loss  is  frequently  undervalued,  and  scarce  ever  valued 
more  than  it  is  worth,  we  may  learn  from  the  very  moderate 
profit  of  insurers."  This  sentence  brings  forcibly  to  our  atten- 
tion the  principle  of  adverse  selection  in  insurance,  whereby  only 
those  as  a  rule  insure  who  feel  that  they  have  a  substantial  risk 
at  stake.  As  in  the  words  of  Smith,  "In  order  to  make  insur- 
ance, either  from  fire  or  sea-risk,  a  trade  at  all,  the  common 
premium  must  be  sufficient  to  compensate  the  common  losses, 
to  pay  the  expense  of  management,  and  to  afford  such  a  profit 
as  might  have  been  drawn  from  an  equal  capital  employed  in 

53 


INSURANCE    ECONOMICS 

any  common  trade.  The  person  who  pays  no  more  than  this, 
evidently  pays  no  more  than  the  real  value  of  the  risk,  or  the 
lowest  price  at  which  he  can  reasonably  expect  to  insure  it." 
When  this  was  written  in  1776  the  whole  practice  of  insur- 
ance was  necessarily  very  much  more  arbitrary,  indefinite  and 
uncertain  than  at  the  present  time. 

During  the  intervening  long  period  of  years  an  immense 
amount  of  experience  has  been  had  and  really  conclusive  statis- 
tical data  have  been  secured  which  afford  a  better  basis  for 
the  calculation  of  premium  rates  and  a  more  certain  profit  to 
those  who  undertake  the  assumption  of  risk;  but  in  the  time 
of  Adam  Smith  it  could  very  properly  be  said  that,  "though 
many  people  have  made  a  little  money  by  insurance,  very  few 
have  made  a  great  fortune;  and,  from  this  consideration  alone, 
it  seems  evident  enough  that  the  ordinary  balance  of  profit 
and  loss  is  not  more  advantageous  in  this  than  in  other  common 
trades,  by  which  so  many  people  make  fortunes."  Smith  was 
entirely  correct  in  placing  insurance,  at  least  at  this  period  of 
time,  on  a  perfect  equality  with  other  commercial  undertakings 
for  gain,  and  this  position  insurance  has  practically  retained  in 
all  the  commercial  codes  of  European  nations  of  ancient  and 
modem  times.  As  emphasizing  the  strictly  commercial  aspects 
of  insurance  as  a  trade.  Smith  observed  that,  "Moderate,  how- 
ever, as  the  premium  of  insurance  commonly  is,  many  people 
despise  the  risk  too  much  to  care  to  pay  it.  Taking  the  whole 
kingdom  at  an  average,  nineteen  houses  in  twenty,  or  rather, 
perhaps,  ninety-nine  in  a  hundred,  are  not  insured  from  fire. 
Sea-risk  is  more  alarming  to  the  greater  part  of  people;  and  the 
proportion  of  ships  insured  to  those  not  insured  is  much  greater. 
Many  sail,  however,  at  all  seasons,  and  even  in  time  of  war, 
without  any  insurance." 

The  Problem  of  Self-Insurance. 

Smith  then  considered  the  question  of  self -insurance,  which 
of  course  is  possible  in  the  case  of  very  large  commercial 
undertakings,  where  the   operations   are   on  a   sufficient  scale 

S3 


INSURANCE    ECONOMICS 

to  become  subject  to  a  law  [of  average  or  the  law  of  large 
numbers.  The  conclusion  advanced  by  Smith  is  favorable  to  the 
self-assumption  of  risk,  if  such  it  may  properly  be  called,  and 
in  his  own  words,  "When  a  great  company,  or  even  a  great 
merchant,  has  twenty  or  thirty  ships  at  sea,  they  may,  as  it 
were,  insure  one  another.  The  premium  saved  up  on  them  all 
may  more  than  compensate  such  losses  as  they  are  likely  to 
meet  with  in  the  common  course  of  chances.  The  neglect  of 
insurance  upon  shipping,  however,  in  the  same  manner  as  upon 
houses,  is,  in  most  cases,  the  effect  of  no  such  nice  calculation, 
but  of  mere  thoughtless  rashness,  and  presumptuous  contempt 
of  the  risk."     (Wealth  of  Nations,  Book  I,  Ch.  X.) 

To  the  average  man  of  business  it  must  necessarily  be  next 
to  impossible  to  arrive  at  more  than  an  approximate  esti- 
mate of  the  risk  which  he  incurs  without  insurance.  He  is 
necessarily  guided  by  past  experience  and  personal  observation 
of  the  disastrous  consequences  resulting  from  contempt  of 
risk  and  indifference  to  insurance  protection.  With  increasing 
average  intelligence  such  a  common  contempt  of  commercial 
risk  necessarily  tends  to  disappear,  and  today  the  insurance 
of  goods  in  commerce  is  practically  universal  and  a  duty 
imposed  upon  merchants  and  traders  by  the  customs  and 
laws  of  trade. 

Insurance  as  a  Branch  of  Commercial  Enterprise. 

Considering  insurance  by  itself  as  a  commercial  institution 
and  on  an  equality  with  commercial  enterprises  generally,  it  is 
suggestive  to  find  in  the  Wealth  of  Nations  a  brief  consider- 
ation of  this  point  of  view.  Adam  Smith,  in  discussing  the 
rise  and  fall  of  commercial  enterprises,  which  had  or  had 
not  exclusive  privileges  in  the  nature  of  a  monopoly  osten- 
sibly for  the  purpose  of  extending  to  them  an  extraordinary 
degree  of  security,  remarks  that,  "The  only  trades  which  it 
seems  possible  for  a  joint-stock  company  to  carry  on  success- 
fully, without  an   exclusive  privilege,  are   those,  of  which  all 

54 


INSURANCE    ECONOMICS 

the  operations  are  capable  of  being  reduced  to  what  is  called 
a  routine,  or  to  such  a  uniformity  of  method  as  admits  of 
little  or  no  variation.  Of  this  kind  is,  first,  the  banking 
trade;  secondly,  the  trade  of  insurance  from  fire  and  from 
sea-risk,  and  capture  in  time  of  war;  thirdly,  the  trade  of 
making  and  maintaining  a  navigable  cut  or  canal;  and,  fourthly, 
the  similar  trade  of  bringing  water  for  the  supply  of  a  great 
city."  It  does  not  fall  within  the  present  discussion  to  ex- 
amine into  the  soundness  of  this  theory,  for  manifestly 
most  other  commercial  enterprises  carried  on  in  the  form  of 
partnerships  can  safely  be  so  carried  on  without  the  right  or 
privilege  of  monopoly.  The  chief  importance  of  the  sentence 
is  the  sense  in  which  the  term  "trade  of  insurance"  is  used  in 
identically  the  same  manner  as  the  trade  of  banking,  with  the 
functions  and  purposes  of  which  insurance  has  naturally  much 
in  common.  Smith  remarks,  however,  with  reference  to  insur- 
ance undertakings,  that,  "The  value  of  the  risk,  either  from 
fire,  or  from  loss  by  sea,  or  by  capture,  though  it  can  not,  per- 
haps, be  calculated  very  exactly,  admits,  however,  of  such  a 
gross  estimation,  as  renders  it,  in  some  degree,  reducible  to 
strict  rule  and  method.  The  trade  of  insurance,  therefore,  may 
be  carried  on  successfully  by  a  joint-stock  company,  without 
any  exclusive  privilege."  The  advantages  of  insurance  to  society 
and  government  are  summarized  by  Adam  Smith  in  the  follow- 
ing suggestive  sentence:  "The  trade  of  insurance  gives  great 
security  to  the  fortunes  of  private  people,  and,  by  dividing 
among  a  great  many  that  loss  which  would  ruin  an  individual, 
makes  it  fall  light  and  easy  upon  the  whole  society.  In  order 
to  give  this  security,  however,  it  is  necessary  that  the  insurers 
should  have  a  large  capital.  Before  the  establishment  of  the 
two  joint-stock  companies  for  insurance  in  London  (the  London 
Assurance  and  the  Royal  Exchange  Assurance),  a  list,  it  is 
said,  was  laid  before  the  attorney-general,  of  150  private  insur- 
ers, who  had  failed  in  the  course  of  a  few  years."  (Smith's 
Wealth  of  Nations,  Book  V,  Ch.  I.) 

55 


insurance  economics 

The  Early  Practice  op  Individual  Underwriting. 

The  last  reference  is  to  the  practice  of  individual  under- 
writing, which  has  never  gained  a  strong  foothold  in  this  country. 
It  was  only  in  use  to  a  limited  extent  during  the  colonial  period. 
It  is  true,  however,  that  through  the  gradual  perfection  of 
Lloyds  a  unique  method  of  individual  underwriting  has  been 
established  in  England,  which  for  all  practical  purposes  is  prob- 
ably as  sound  and  secure  as  corporate  underwriting,  but  the 
practice  of  Lloyds  is  limited  largely  to  marine  insurance,  which 
in  its  nature  differs  quite  essentially  from  insurance  against  fire 
and  the  contingencies  of  human  life.  The  assumption  of  excep- 
tional risks  which  are  more  or  less  in  the  nature  of  gambling 
ventures,  by  small  groups  of  underwriters  at  Lloyds,  does  not 
fall  within  the  corporate  practice  of  Lloyds,  but  they  are  private 
undertakings  in  much  the  same  manner  as  private  deals  may 
be  conducted  by  members  of  an  estabUshed  stock  exchange, 
including  transactions  which  would  not  be  recognized  by  the 
exchange  itself. 

Discussion  op  Insurance  by  John  Stuart  Mill. 
From  Adam  Smith  (1776)  to  John  Stuart  Mill  (1848) 
insurance  is  only  incidentally  referred  to  by  writers  on  political 
economy.  The  significance  of  insurance  as  an  element  of 
economics  escaped  the  attention  of  writers  who  gave  concern 
primarily  to  the  purely  technical  aspects  of  economic  science. 
Mill  himself  refers  to  insurance  very  briefly  as  one  of  the 
sources  of  profit,  which  he  considers  are  resolved  into  interest, 
insurance,  and  wages  of  superintendence.  It  appears  to  have 
escaped  the  attention  of  Mill  that  interest  itself  is  but  a  form 
of  insurance,  or  at  least  that  portion  of  the  rate  which  exceeds 
the  lowest  return  paid  on  government  securities  of  unquestion- 
ably the  highest  intrinsic  value.  Interest,  in  a  measure,  is  but 
another  term  for  compensation  for  risk,  while  insurance  is  essen- 
tially the  equivalent  for  risk  assumption  in  merchant  adventure 

56 


INSURANCE    ECONOMICS 

or  commercial  and  individual  enterprises  of  all  kinds.  The 
remuneration  of  capital  in  different  undertakings  at  a  compara- 
tively high  rate  of  interest  is  not  essentially  different  in  its  nature 
from  the  assumption  of  risk  in  merchant  adventure  guaranteed 
against  loss  by  policies  of  insurance.  Mill  observes  that,  **  The 
profits,  for  example,  of  retail  trade,  in  proportion  to  the  capital 
employed,  exceed  those  of  wholesale  dealers  or  manufacturers, 
for  this  reason  among  others,  that  there  is  less  consideration 
attached  to  the  employment.  The  greatest,  however,  of  these 
differences,  is  that  caused  by  difference  of  risk."  He  then 
continues,  "  The  profits  of  a  gunpowder  manufacturer  must 
be  considerably  greater  than  the  average,  to  make  up  for  the 
peculiar  risks  to  which  he  and  his  property  are  constantly 
exposed.  When,  however,  as  in  the  case  of  marine  adventure, 
the  peculiar  risks  are  capable  of  being,  and  commonly  are, 
commuted  for  a  fixed  payment,  the  premium  of  insurance 
takes  its  regular  place  among  the  charges  of  production,  and 
the  compensation  which  the  owner  of  the  ship  or  cargo  receives 
for  that  payment,  does  not  appear  in  the  estimate  of  his  profits, 
but  is  included  in  the  replacement  of  his  capital."  (Principles 
of  Political  Economy,  5th  edition,  vol.  I,  p.  500.) 

It  is  evident  from  the  foregoing  that  if  Mill  had  carried 
his  argument  further  he  could  not  have  failed  to  come  to  the 
conclusion  that  insurance  is  an  element  of  commerce  or  com- 
mercial enterprise,  certainly  to  the  extent  that  it  materially 
affects  the  cost  of  production,  which  would  unquestionably  be 
greater  in  many  branches  of  industry  if  the  undertaking  had  to 
be  carried  on  without  the  protection  of  a  policy  of  insurance. 

Robert  Ellis  Thompson,  who  wrote  a  treatise  on  Political 
Economy,  pubhshed  in  Philadelphia  in  1875,  and  a  revised 
edition  in  1882,  included  insurance  in  a  brief  consideration  of 
commercial  credits,  observing  in  part  that  where  a  seller  has 
to  grant  credit  he  cannot  afford  to  sell  goods  at  as  low  a  figure 
as  if  he  were  paid  in  cash,  but  that  in  fact  prices  vary  according 
to  the  length  of  the  credit,  and  that  the  difference  in  price  is 
greater  than  the   difference   in  the  amount   of  loss  resulting 

57 


INSURANCE   ECONOMICS 

from  the  discount  of  commercial  paper.  He  observes  that 
the  creditor  "has  to  insure  himself  against  bad  debts  by  an 
increase  of  his  profits  on  all  transactions.  He  must  charge 
more  to  good  customers  in  order  to  insure  himself  against  bad 
ones."  This  sentence  would  seem  to  sustain  the  theory  of  Mill 
that  insurance  is  an  element  of  profit  and  by  inference  an 
element  in  the  cost  of  production. 

Viewpoint  of  a  German  Economist. 

The  first  extended  consideration  of  the  place  of  insurance 
in  political  economy  was  brought  to  the  attention  of  English 
readers  by  the  translation  of  Roscher's  Principles  of  Political 
Economy,  by  Mr.  John  J.  Lalor,  published  in  1878.  The  first 
German  edition,  however,  had  been  published  in  1854.  Roscher 
included  insurance  in  his  consideration  of  the  elements  of  con- 
sumption, dividing  his  subject  into  mutual  and  speculative  insti- 
tutions, a  brief  discussion  of  the  economic  advantages  of  insur 
ance,  and  the  requisites  of  a  good  system  of  fire  insurance.  It 
requires  no  extended  knowledge  of  the  subject  to  make  it  clear 
that  this  discussion  was  entirely  inadequate  and  that  it  proceeded 
from  a  superficial  appreciation  of  the  service  rendered  by  insur- 
ance to  every  important  branch  of  trade  and  industry  as  well 
as  its  relation  to  the  social  welfare  of  the  peoples  of  civilized 
nations.  Many  of  his  observations,  made  at  a  period  when 
insurance  was  practically  in  its  beginnings,  are  no  longer  appli- 
cable to  modem  conditions,  as  among  others,  his  statement 
that,  "to  the  poorest  class  of  those  who  need  insurance,  private 
insurance  will  perhaps  be  never  properly  accessible."  More 
recent  experience  has  successfully  demonstrated  that  for 
certain  important  ends  even  the  poor,  by  small  deductions 
from  their  income,  can  provide  by  insurance  for  what  custom 
has  sanctioned  as  the  most  necessary  expenses  incident  to 
burial  and  funeral  observances.  It  is  true  that  the  progress  of 
insurance  has  been  less  successful  in  the  case  of  fire  insurance, 
but  even  in  this  direction  a  substantial  advance  has  been  made 
and  with  the  increasing    security   of   dwellings  against  fire  the 

58 


INSURANCE   ECONOMICS 

absolute  necessity  for  such  protection  perhaps  no  longer  exists. 
Roscher,  among  other  interesting  observations,  however,  defined 
precisely  the  fundamental  principle  of  all  insurance  in  the  words 
that,  "the  aggregate  danger  is  less  than  the  sum  of  indi- 
vidual dangers  for  the  reason  that  it  is  more  certain,  and  that  the 
uncertainty,  of  itself,  is  an  element  of  danger."  While  leaning 
strongly  toward  government  insurance,  at  least  in  the  case  of 
fire  institutions,  he  observes  that,  "the  idea  sometimes  suggested 
in  our  day  of  making  the  system  of  insurance  a  government  pre- 
rogative, arises  as  much  from  the  passion  for  centralization  as 
from  socialistic  tendencies."  As  partly  in  answer  to  this 
suggestion  he  quoted  from  Spittler's  Politics  the  objection  to 
insurance  "that  it  diminishes  benevolence  and  approximates  to 
communism,  thus  hitting  the  dark  side  of  all  very  high  civili- 
zation." The  German  system  of  communal  fire  insurance  always 
has  been  limited  to  houses,  partly  for  the  purpose  of  protecting 
the  lender  of  money  on  mortgages  against  substantial  loss. 
The  function  of  government  insurance  has  never  extended  to 
movable  property — that  is,  furniture,  etc. — and  Roscher  observes 
that,  "the  thought  of  making  this  species  of  insurance  com- 
pulsory, or  of  turning  it  over  to  the  State,  has  seldom  been 
suggested."  Aside  from  these  considerations  of  insurance  in 
its  political  and  social,  rather  than  in  its  strictly  economic 
aspects,  the  observations  of  Roscher  have  no  practical  value 
to  the  students  of  economics  at  the  present  time. 

Insurance  as  a  Factor  in  Distribution. 

Contrary  to  the  theory  of  Mill,  of  including  insurance  and 
interest  as  elements  of  profit.  Prof.  Francis  A.  Walker  con- 
sidered interest  as  an  element  of  distribution,  distinguishing 
precisely  between  true  interest,  or  the  lowest  rate  of  return 
on  money  lent  upon  absolute  security,  and  the  higher  rate  of 
interest  charged  on  account  of  extra  risk  incurred.  In  the 
words  of  Walker,  "A  great  deal  that  is  paid  under  the  name  of 
interest  is  not  interest  in  the  true  sense,  but  is  merely  a  pre- 
mium for  the  insurance  of  the  principal  sum  lent.    Real  interest 

59 


INSURANCE   ECONOMICS 

only  comprises  that  part  of  the  payment  made  which  would 
be  paid,  were  the  return  of  the  principal,  at  the  date  of  the 
maturity  of  the  obligation,  a  matter  of  reasonable  certainty. 
Absolute  assurance  can  be  reached  in  no  human  transaction; 
but  where  the  risk  is  so  small  that  it  amounts  to  nothing  in  the 
mind  of  the  lender,  as  in  the  case  of  British  consols,  or  of  a 
* 'bottom  mortgage,"  where  the  sum  lent  is  only  a  half  or  a 
third  of  the  value  of  improved  real  estate,  we  have  an  instance 
of  real  interest,  pure  and  simple."  In  continuation,  however, 
he  observes  that,  **  Whatever,  in  the  same  market,  at  the  same 
time,  is  paid  above  this,  for  the  use  of  capital,  is  of  the 
nature  of  insurance  against  the  risk  of  losing  the  amount  lent." 
And  he  observes  further,  with  particular  reference  to  extra- 
hazardous risks  and  losses  in  speculative  undertakings,  in 
which  more  than  double  the  normal  rate  of  interest  is  usually 
paid,  that  "  With  investments  or  temporary  loans  inside  this 
limit,  a  different  rule  obtains.  The  rates  of  interest  paid  are 
still  graded  with  little  real  appreciation  of  the  degrees  of  risk 
taken;  the  sums  obtained  as  insurance  cannot  be  assumed 
to  be  proportioned  to  the  hazard;  yet  it  is  generally  possible 
for  an  investor  or  lender  to  say,  this  is  ipore  safe  than  that: 
the  adverse  chances  here  are  few  and  small ;  are  many  and  great 
there."  Walker  illustrates  this  principle  by  a  concrete  exam- 
ple of  an  investment  by  the  same  person  on  the  same  day,  who 
purchases  government  bonds  paying  four  per  cent.,  railway 
shares  paying  six  per  cent.,  and  loans  on  personal  security 
a  like  amount,  paying  ten  per  cent.  He  remarks  that  the  three 
portions  of  capital  lent  or  invested  exhibited  no  economic 
differences,  and  that  the  phenomenon  noted — that  is,  the  differ- 
ential rate  of  interest  paid — ^is  due  in  part  to  the  insurance  of 
the  principal  sum  lent.  Of  course,  insurance  in  this  sense  is 
widely  different  from  insurance  in  actual  commercial  practice, 
but  in  essence  the  function  is  the  same  in  that  the  risk  is  dis- 
tributed approximately  in  proportion  to  the  degree  of  hazard 
incurred.  By  such  distribution  the  hazard  itself  is  partly 
eliminated  and  mercantile  adventure  is  made  possible;  or,  in 

60 


INSURANCE   ECONOMICS 

other  words,  risk  assumption  is  made  comparatively  safe  in  the 
equalization  of  losses  which  are  likely  to  occur  with  a  reason- 
able degree  of  certainty  in  conformity  to  the  past  experience 
of  mankind. 

Insurance  in  Social  Economics. 

In  social  economics  insurance  pre-eminently  signifies  finan- 
cial security  of  the  family  or  other  social  relations.  From 
the  strictly  utilitarian  point  of  view  insurance  is  a  decidedly 
effective  aid  in  the  promotion  of  general  happiness.  Writers 
of  the  utilitarian  school  appear  to  have  generally  neglected 
insurance  as  a  factor  demanding  serious  consideration,  and  the 
theory  of  human  happiness  conditioned  on  the  gratification 
of  human  wants  and  desires  is  practically  independent  of  insur- 
ance as  contributing  toward  this  end.  One  of  the  few  modem 
writers  on  utilitarianism,  Mr.  Michael  Macmillan,  has,  however, 
given  a  brief  consideration  to  the  subject  in  his  treatise  on 
"  The  Promotion  of  General  Happiness,"  observing  that,  "what 
remains  to  be  done  is  to  encourage  the  practice  of  insurance 
in  its  more  readily  recognized  forms.  Either  the  Nation  as  a 
whole,  or  individuals,  must  be  taught  to  provide  funds  of 
savings  for  their  support  in  times  of  scarcity."  Life  insurance, 
by  its  very  nature  enforces  abstinence  by  the  periodical  pay- 
ments required  to  be  made,  and  provides  more  effectively  than 
any  other  method  of  savings  or  investment  for  periods  of  want, 
scarcity  and  distress.  The  view  held  by  Macmillan  with  refer- 
ence to  the  utilitarian  function  of  life  insurance  is  of  particular 
interest  and  in  part  explained  as  follows: 

"Vegetarians  and  total  abstainers  may  also  be  defended 
against  the  effect  of  misfortune  by  life  assurance — an  arrange- 
ment by  which  wives  and  children  are  defended  against  desti- 
tution, in  the  case  of  the  early  death  of  a  husband  and  father, 
and  by  which  people  generally  can  protect  themselves  and 
their  families,  to  a  certain  extent,  against  heavy  loss  from  illness 
and  accidents.  It  may  be  described  in  sporting  phrase  as  a 
kind  of  hedging  against  extreme  misfortune  by  an  agreement 
between  a  certain  number  of  persons,  namely,  those  who  take 
policies  in  the  same  office,  that  those  who  are  fortunate  shall 

6i 


INSURANCE   ECONOMICS 

give  support  to  those  who  are  unfortunate.  This  insurance 
tends  to  equalize  the  lot  of  all  insurers.  Those  who  die  young, 
or  incur  the  particular  misfortunes  insured  against,  gain  by- 
insurance,  while  those  who  live  long,  and  do  not  suffer  from  the 
illness  or  accidents,  or  other  misfortune,  against  which  they 
insured  themselves,  are  pecuniarily  losers;  for,  if  they  had 
invested  their  money  in  other  investments,  they  would  probably 
have  been  richer.  This  system  has,  without  doubt,  when 
applied  in  its  natural  and  most  common  way,  considerably 
alleviated  the  misery  of  mankind." 

The  Equalization  and  Distribution  op  Wealth  By 
Insurance. 

Insurance  makes  peculiarly  for  equality  in  the  distribution 
of  wealth,  and  to  this  extent  as  much  as,  if  not  more  than,  any 
other  element  of  social  and  economic  progress,  makes  for  the 
promotion  of  happiness.  Macmillan  remarks  with  reference  to 
this  particular  point  that: 

"  The  difference  between  the  misery  of  uninsured  orphans, 
widows,  and  men  incapacitated  for  work,  or  attacked  by  sudden 
misfortune,  and  the  less  misery  which  they  would  suffer  if  pro- 
tected by  insurance,  is  greater  than  the  loss  of  happiness  owing 
to  waste  of  wealth  incurred  by  those  who  have  insured  against 
misfortune,  and  been  long-lived  and  fortunate.  Further,  there 
must  be  taken  into  account  the  peace  of  mind  of  the  man  who 
has  been  prudent  enough  to  insure  himself  against  misfortune, 
as  compared  with  the  anxiety  about  the  future  in  the  heart 
of  the  man  who  has  not  insured  himself,  and  those  dearest 
to  him,  against  sudden  and  overwhelming  calamity.  Thus, 
there  are  two  great  advantages  secured  by  insurance.  On  the 
other  side,  it  may  be  said,  that  insured  persons  will  be  less 
careful  to  avoid  danger.  This  is  true,  but  only  to  a  very 
limited  extent,  and,  in  some  occupations,  it  is  a  duty  to  face 
danger  boldly,  so  that,  in  some  cases,  insurance  helps  men  to 
do  their  duty  well." 

'  Social  Progress  and  General  Happiness. 
The  risk  to  life  and  health  involved  in  certain  occupations 
can,  without  difficulty,  be  conceived  as  a  detriment  to  social 
and  economic  progress  unless  balanced  by  insurance  protection 

62 


INSURANCE    ECONOMICS 

against  extraordinary  losses.  Human  life  has  a  well-defined 
financial  value,  the  equivalent  of  which  is  measured  by  the  rate 
of  insurance,  which  varies  according  to  the  risk  incurred  in  the 
pursuit  of  dangerous  trades.  Many  such  trades  would  not  be  as 
readily  followed  were  it  not  for  the  insurance  protection  secured 
in  return  for  the  payment  of  a  slight  additional  premium. 
Many  commercial  risks  would  in  a  similar  manner  be  avoided 
were  it  not  for  the  security  against  exceptional  losses  secured  by 
insurance.  It  is  not  difficult,  of  course,  to  conceive  of  disad- 
vantages resulting  from  insurance,  and  among  other  plausible 
arguments  against  life  insurance  in  particular,  Macmillan 
mentions  the  encouragement  of  marriage  and  the  resulting 
increase  in  over-population.  He  remarks  with  reference  to 
this  point,  that: 

"  There  is  indeed,  no  doubt  that  young  men,  who  would 
otherwise  have  remained  single,  are  enabled  to  marry  by  the 
possibility  of  insuring  their  lives  and  so  defending  their  families 
against  destitution  in  the  event  of  their  early  death.  But  this 
is  no  evil,  but  rather  a  defence  against  a  great  danger.  The 
reckless  marriages  of  the  improvident  have  long  threatened 
to  drive  prudence  out  of  the  world  by  causing  a  large  portion 
of  each  new  generation  to  be  children  inheriting  improvidence 
from  improvident  parents.  Whatever  encourages  the  prudent 
to  marry  must  surely  have  a  beneficial  effect  on  the  future 
of  the  human  race.  So,  after  considering  possible  objections, 
we  may  come  to  the  conclusion,  that  the  institution  of  insur- 
ance has  promoted  the  happiness  of  the  world,  and  that  the 
practice  should  be  encouraged  by  utilitarians,  especially  among 
nations  of  vegetarians  and  total  abstainers." 

While  the  foregoing  remarks  apply  to  sociology,  rather  than 
to  economics,  they  are  a  significant  addition  to  the  very  frag- 
mentary consideration  which  insurance  has  received  from 
qualified  writers  on  the  subject  of  social  economics.  They  con- 
firm the  consensus  of  opinion  of  the  people  of  civilized  nations, 
that  without  insurance  the  social  and  economic  progress  of 
the  time  could  not  have  been  achieved,  and  that  the  security 
resulting  from  the  practice  of  insurance  in  every  branch  of 
trade  as  well  as  in  the  more  delicate  affairs  of  domestic  life, 

63 


INSURANCE   ECONOMICS 

is  equivalent  to  the  attainment  of  a  distinct  and  most  effective 
form  of  practical  humanitarianism. 

Insurance  as  a  Factor  in  Business. 

The  economic  aspects  of  insurance  as  a  factor  in  modem 
business  enterprise,  or  the  relation  in  which  insurance  against 
the  risks  of  a  business  stands  to  the  supply  price  of  any  par- 
ticular commodity  produced,  were  first  considered  by  Marshall 
in  his,  "Principles  of  Economics,"  the  first  edition  of  which  was 
published  in  1890,  written  with  a  limited  knowledge  of  the 
almost  infinite  possibilities  of  utilizing  the  principle  of  insurance 
in  the  numerous  and  widely  varying  conditions  of  business, 
Marshall  held  the  opinion  that  insurance  could  not  be  effected 
at  moderate  rates  against  all  business  risks,  observing  that: 

"  The  manufacturer  and  the  trader  commonly  insure  against 
injury  by  fire  and  loss  at  sea ;  and  the  premiums  which  they  pay 
are  among  the  general  expenses,  a  share  of  which  has  to  be 
added  to  the  prime  cost  in  order  to  determine  the  total  cost  of 
their  goods.  But  no  insurance  can  be  effected  against  the  great 
majority  of  business  risks." 

There  can  be  no  question  of  doubt  that  many  of  the  minor 
risks  of  business  can  be  conveniently  covered  by  insurance, 
but  the  modem  development  of  many  branches  of  insurance 
entirely  unknown  in  the  past,  proves  the  possibilities  of  further 
specialization,  which  may  enable  the  merchant  to  insure  against 
losses  which  are  now  unprovided  for.  Marshall  remarks,  with 
reference  to  this  point: 

"  Even  as  regards  losses  by  fire  and  sea,  insurance  com- 
panies have  to  allow  for  possible  carelessness  and  fraud;  and 
must  therefore,  independently  of  all  allowances  for  their  own 
expenses  and  profits,  charge  premiums  considerably  higher 
than  the  true  equivalent  of  the  risks  run  by  the  buildings  or  the 
ships  of  those  who  manage  their  affairs  well.  The  injury  done 
by  fire  or  sea,  however,  is  likely,  if  it  occurs  at  all,  to  be  so  very 
great  that  it  is  generally  worth  while  to  pay  this  extra  charge; 
partly  for  special  trade  reasons,  but  chiefly  because  the  total 
utility  of  wealth  increases  less  than  in  proportion  to  its  amount. 
But  the  greater  part  of  business  risks  are  so  inseparably  con- 


INSURANCE   ECONOMICS 

nected  with  the  general  management  of  the  business  that  an 
insurance  company  which  undertook  them  would  really  make 
itself  responsible  for  the  business;  and  in  consequence  every 
firm  has  to  act  as  its  own  insurance  office  with  regard  to  them. 
The  charges  to  which  it  is  put  under  this  head  are  part  of  its 
general  expenses,  and  a  share  of  them  has  to  be  added  to  the 
prime  cost  of  each  of  its  products." 

Loss  Prevention  and  Insurance. 

Many  of  the  risks  of  business  which  Marshall  must  have  had 
in  mind  when  writing  the  preceding  paragraph  are  not  convert- 
ible into  exact  monetary  equivalents,  resulting,  as  he  points  out, 
from  mismanagement,  for  which,  of  course,  an  insurance 
company  can  probably  never  assume  entire  responsibility.  Nor 
would  it  be  advisable  that  it  should  do  so  since  such  insurance 
might  put  a  premium  upon  incapacity  and  negligence,  which 
under  given  conditions  might  be  decidedly  detrimental  to  the 
general  welfare  and  contrary  to  public  policy.  It  is  equally 
difficult  to  differentiate  a  theory  of  pure  insurance  against  loss 
or  uncertainty  from  insurance  devices  which  really  provide 
effective  safeguards  or  preventive  measures  tending,  more  or 
less  successfully,  to  the  entire  elimination  of  loss.  This  is  par- 
ticularly well  illustrated  in  the  case  of  steam  boiler  insurance, 
where  most  of  the  premium  income  is  expended  not  in  the  pay- 
ment of  losses,  but  in  expenditures  for  effective  inspections.  A 
similar  result  has  followed  the  well  known  system  of  mutual  fire 
insurance  of  Massachusetts  cotton  mills,  which  secure  insurance 
protection  at  less  than  the  ordinary  rates  on  condition  that  proper 
sprinkling  and  other  devices  are  employed,  together  with  con- 
formity to  advanced  methods  of  building  construction.  It  is 
an  open  question,  however,  whether  it  is  correct  to  consider  the 
cost  of  such  preventive  devices  as  an  insurance  premium  in  the 
sense  that  it  is  a  contribution  toward  the  equalization  of  losses. 

Economics  of  Self-Insurance. 

Equally  difficult  of  exact  definition  is  the  economic  func- 
tion   of   self-insurance — that    is,    where    the    risk   of   property 

6s 


INSURANCE    ECONOMICS 

destruction  is  assumed  by  large  owners  or  combinations  of 
capital  with  a  sufficiently  large  exposure  of  risk  to  secure  prac- 
tically the  same  results  as  would  be  experienced  in  the  case  of 
a  small  insurance  company.  Marshall  refers  to  cases  of  this 
kind  as  follows: 

"  In  some  cases  insurance  against  risk  is  apt  to  be  left  out 
of  account,  altogether,  in  others  it  is  apt  to  be  counted  twice 
over.  Thus  a  large  shipowner  sometimes  declines  to  insure  his 
ships  with  the  underwriters;  and  sets  aside  part  at  least  of  the 
premiums  that  he  might  have  paid  to  them,  to  build  up  an 
insurance  fund  of  his  own.  But  he  must  still,  when  calculating 
the  total  cost  of  working  a  ship,  add  to  its  prime  cost  a  charge 
on  account  of  insurance.  And  he  must  do  the  same  thing,  in 
some  form  or  other,  with  regard  to  those  risks  against  which 
he  could  not  buy  an  insurance  policy  on  reasonable  terms  even 
if  he  wanted  to.  At  times,  for  instance,  some  of  his  ships  will 
be  idle  in  port,  or  will  earn  only  nominal  freights;  and  to  make 
his  business  remunerative  in  the  long  run  he  must,  in  some  form 
or  other,  charge  his  successful  voyages  with  an  insurance  pre- 
mium to  make  up  for  his  losses  on  those  which  are  unsuccessful." 

Insurance  Exe^ense  in  Business  Accounts. 

In  all  such  problems  as  these  the  insurance  function  is 
apt  to  be  more  or  less  obscure,  and  its  proper  apportionment 
as  a  contribution  to  risk  assumption  or  loss  equalization  is 
very  difficult.  Marshall  cautions  against  overlooking  certain 
insurance  expenses  of  this  kind,  more  or  less  properly  so  de- 
fined and  he  warns  against  others  being  considered  twice  in 
mercantile  accounting,  observing  that: 

**  In  general,  however,  he  does  this,  not  making  a  formal 
entry  in  his  accounts  under  a  separate  head,  but  by  the  simple 
plan  of  taking  the  average  of  successful  and  unsuccessful  voyages 
together;  and  when  that  has  once  been  done,  insurance  against 
these  risks  cannot  be  entered  as  a  separate  item  in  cost  of  pro- 
duction, without  counting  the  same  thing  twice  over.  Having 
decided  to  run  these  risks  himself,  he  is  likely  to  spend  a  little 
more  than  the  average  of  his  competitors,  in  providing  against 
their  occurrence ;  and  this  extra  expense  enters  in  the  ordinary 
way  into  his  balance-sheet.     It  is  really  an  insurance  premium 


INSURANCE    ECONOMICS 

in  another  form;  and  therefore  he  must  not  count  insurance 
against  this  part  of  the  risk  separately,  for  then  he  would  be 
counting  it  twice  over." 

The  involved  nature  of  calculations  of  this  kind  is  best 
made  evident  by  concrete  illustrations  derived  from  actual 
experience.  In  all  such  cases  the  insurance  premium  is  always 
an  element  of  ultimate  cost  to  the  consumer,  although  it  serves 
the  useful  function  of  reducing  cost  by  a  clearly  traceable 
reduction  in  risk,  which  would  otherwise  constitute  a  hazard 
requiring  to  be  made  good  by  an  increase  in  price.  Proper 
safety  precautions,  particularly  effective  methods  of  fire  pre- 
vention, will,  other  things  equal,  result  in  a  lower  rate  of  insur- 
ance and  to  this  extent  lower  the  ultimate  price  of  goods  to  the 
consumer;  or  to  the  extent  of  the  saving  effected  increase  the 
profits  of  the  manufacturer  or  merchant.  As  illustrated  by 
Marshall : 

"  When  a  manufacturer  has  taken  the  average  of  his  sales 
of  dress  materials  over  a  long  time,  and  bases  his  future  action 
on  the  results  of  his  past  experience,  he  has  already  allowed  for 
the  risk  that  the  machinery  will  be  depreciated  by  new  inven- 
tions rendering  it  nearly  obsolete,  and  for  the  risk  that  his 
goods  will  be  depreciated  by  changes  in  fashion.  If  he  were 
to  allow  separately  for  insurance  against  these  risks,  he  would 
be  counting  the  same  thing  twice  over." 

Insurance  as  an  Element  in  the  Cost  op  Production. 

In  economics  insurance  against  risk  may,  in  other  words, 
be  provided  for  by  preventive  measures,  by  increased  caution, 
intelligence  and  experience,  as  well  as  by  the  direct  payment 
of  a  premium  to  the  insurance  company  assuming  certain 
responsibility  for  certain  well  defined  classes  of  risk.  In  all 
cases  insurance  is  an  element  in  the  cost  of  production,  and  the 
cost  must  be  diminished  in  proportion  as  uncertainty  is  reduced 
to  a  minimum.  Trades  which  partake  of  the  nature  of  adventure 
are  more  in  need  of  insurance,  particularly  when  the  adventure 
is  that  of  a  sea  voyage  to  distant  ports,  than  normal  commercial 
undertakings  in  the  manufacture  or  sale  of  staple  products,  but 

(57 


INSURANCE   ECONOMICS 

in  each  case  insurance  in  any  one  or  more  of  its  various  forms 
will  prove  a  decided  advantage  and  tend  to  establish  an  equi- 
librium in  trade  relations.  Commercial  credit  itself  would  be 
a  totally  different  matter  were  it  not  for  insurance  covering 
the  value  of  the  goods  against  destruction  by  fire,  the  terrors 
of  the  sea  or  theft,  etc.,  as  the  case  may  be.  Commercial  credit 
without  insurance  would  result  in  decidedly  higher  rates  of 
interest  to  be  paid  on  commercial  paper,  and  in  exact  pro- 
portion the  ultimate  cost  of  goods  to  the  consumer  would  be 
increased. 

The  Place  of  Insurance  in  Economic  Theory. 

It  must  be  evident  from  the  foregoing  that  the  theory  of 
risk  and  insurance  requires  to  be  elaborated  more  fully  by 
qualified  minds  before  it  can  be  applied  in  its  entirety  to  the 
solution  of  social  and  economic  problems.  Political  economy 
itself  is  as  yet  very  far  from  having  attained  to  the  position  of 
a  science  and  most  of  its  maxims  and  definitions  are  matters  of 
doubt,  speculation,  and  dispute.  One  of  the  most  hopeful 
indications  of  gradual  perfection  in  economic  theory  is  the 
painstaking  work  of  Mr.  Henry  Dunning  Macleod,  who  for 
forty  years  has  contributed  a  number  of  very  important  works 
on  the  theory  of  credit  and  the  elements  of  economics,  in  which 
he  has  given  some  consideration  to  insurance.  No  writer  has 
more  precisely  defined  the  almost  neglected  field  of  incorporeal 
property,  or  what  for  want  of  a  better  term  is  defined  by  him  as 
negative  economic  quantities.  His  definition  is  illustrated  by  the 
explanation  that  "every  sum  of  money  is  equivalent  not  only  to 
a  certain  quantity  of  material  commodities  or  labor,  but  also  to 
the  sum  of  the  present  values  of  an  indefinite  series  of  future 
payments,  or  to  an  Annuity.''  An  annuity  he  defines  as  "the 
right  to  demand  and  receive  a  series  of  payments,"  and  he 
remarks  that  "the  lowest  form  of  an  annuity  is  the  right  to 
receive  one  future  payment,  such  as  a  banknote  or  a  bill  of 
exchange."  Conversely,  "the  highest  form  of  an  annuity  is  to 
receive  a  series  of  future  payments  for  ever,  such  as  an  estate 

68 


INSURANCE    ECONOMICS 

in  land  or  the  funds;  an  annuity  to  receive  a  series  of  pay- 
ments intermediate  between  these  extreme  terms  is  called  a 
terminable  annuity."  Applying  this  theory  to  his  definition 
of  positive  and  negative  signs  to  property,  and  of  denoting 
"the  right  to  property  in  things  which  have  already  come  into 
possession  as  positive,  and  the  right  or  property  to  things 
which  will  only  come  into  possession  at  some  future  time  as 
negative,"  he  concludes  that  "many  species  of  property  are  of 
a  mixed  nature;  that  is,  the  entire  property  in  them  consists 
partly  of  corporeal  property  and  partly  of  incorporeal  property." 
Holding  that  property  in  land  is  the  highest  of  all  forms 
of  property,  Macleod  concludes  that  the  purchase  of  an  estate 
in  land  is  simply  the  purchase  of  a  perpetual  annuity;  and 
further,  that  every  sum  of  money  is  not  only  equal  in  value  to  a 
certain  quantity  of  material  goods,  or  to  a  certain  quantity  of 
services,  but  also  to  a  perpetual  annuity,  and  that  hence  "an 
annuity,  or  the  right  to  receive  a  series  of  future  payments, 
is  an  economic  quantity  which  may  be  bought  and  sold  or 
exchanged,  or  whose  value  may  be  measured  in  money  like  any 
material  chattel."  It  is  difficult  to  give  any  clearness  to  this 
rather  involved  doctrine  separate  from  the  extensive  discussion  of 
the  fundamental  precepts  and  axioms  which  underlie  the  whole 
economic  theory  of  Macleod;  but  the  conclusions  are  of 
much  practical  significance  when  applied  particularly  to 
the  legal  doctrine  that  insurance  is  not  an  element  of  com- 
merce, nor  an  instrumentality  thereof.  Upon  the  basis  of 
Macleod 's  definition  of  an  annuity  he  is  justified  in  holding  that 
such  an  annuity  may  be  paid  to  secure  a  certain  sum  of  money 
at  a  given  time,  or  on  a  given  contingency  such  as  a  life  or  fire 
insurance,  and  that  the  whole  field  of  economics  comprehends 
in  its  final  analysis  the  three  great  departments  of,  first,  material 
things;  second,  personal  qualities  both  in  the  form  of  labor  and 
credit;  and  third,  annuities.  Writers  of  the  older  school  of 
economists  have  failed  to  realize  the  extreme  significance  of 
the  last,  although  in  the  words  of  Macleod,  it  is  indeed  the 
most  extensive  branch  of  economics  at  the  present  day. 

69 


insurance  economics 

Negative  Economic  Quantities. 

In  other  words,  according  to  this  writer,  who  more  than 
any  other  has  apparently  given  concern  to  the  abstract  theory 
of  insurance  and  risk  as  elements  of  economics,  "all  annuities, 
or  rights  to  receive  a  series  of  future  payments,  whether  the 
right  be  to  receive  a  single  future  payment,  or  a  limited,  or 
an  infinite  number  of  them,  are  negative  economic  quantities," 
and  "  these  negative  economic  quantities  comprehend  all  mercan- 
tile and  banking  credit,  such  as  bank-notes,  cheques,  bills  of 
exchange,  and  all  instruments  of  credit;  exchequer  bills,  navy 
bills,  dividend  warrants,  etc.;  the  land,  the  funds,  terminable 
annuities,  shares  in  commercial  companies,  the  good  will  of  a 
business,  a  professional  practice,  copyrights,  patents,  tolls, 
ferries,  market  rights,  advowsons,  benefices,  shootings,  fish- 
eries, leaseholds,  policies  of  insurance  of  different  kinds,  and 
many  other  valuable  rights,  amounting  in  value  to  scores  of 
thousands  of  millions  in  this  country,  of  which  there  is  scarcely 
any  notice  in  the  common  text-books  on  economics."  He  very 
truly  observed  that  by  introducing  this  class  of  incorporeal 
property  he  has  doubled  the  field  of  economics,  and  in  all  prob- 
ability he  has  very  much  more  than  doubled  it,  considering  the 
enormous  extent  to  which  commercial  negotiable  instruments  of 
all  kinds  are  utilized  in  the  commercial  activity  of  the  present  day. 

Insurance  as  an  Economic  Function  in  Modern  Life. 

The  science  of  economics  in  the  larger  sense  comprehends 
more  than  a  mere  science  of  wealth  or  the  three  essential  functions 
of  production,  distribution  and  consumption.  Prof.  Hadley  in 
his  treatise  on  Economics  includes  competition,  speculation, 
investments  of  capital,  combination  of  capital,  money,  credit, 
profits,  co-operation,  protective  legislation,  etc.  All  these  are 
more  or  less  affected  by  insurance,  or  they  re-act,  favorably 
or  otherwise,  upon  the  development  and  growth  of  insurance 
institutions.  Hadley  first  considers  insurance  in  an  extended 
discussion  of  economic  responsibility,  with  special  reference  to 
methods  and  means  tending  toward  a  deliberate  reduction  in 

70 


INSURANCE   ECONOMICS 

the  burdens  of  pauperism.  Commenting  upon  tne  German 
compulsory  insurance  system,  which  had  then  but  a  little  more 
than  a  decade  of  actual  experience,  Hadley  remarks: 

"  There  are  many  reformers  who  are  anxious  that  other 
countries  should  follow  the  example  of  Germany.  But  the 
experiment  has  not  progressed  far  enough  to  pass  judgment 
on  its  success.  In  many  respects  the  gain  to  the  public  from 
a  system  of  this  kind  is  more  apparent  than  real.  The  payments 
to  the  insurance  funds  must  chiefly,  if  not  wholly,  come  out 
of  wages.  Even  though  they  be  nominally  levied  on  the  employer, 
he  is  compelled  by  competition  with  other  employers  who  are 
not  subject  to  this  levy  to  reduce  in  corresponding  degree  the 
wages  which  he  pays." 

Observations  on  Compulsory  and  Voluntary  Insurance. 

Contrasting  compulsory  insurance  with  voluntary  insurance, 
as  particularly  emphasized  in  the  friendly  societies  of  England, 
Hadley  remarks  that  these  are  in  their  nature  agencies  for  the 
promotion  of  voluntary  saving  as  a  means  of  mutual  insurance. 
He  therefore  concludes  that,  **  If  the  government  uses  com- 
pulsory saving  as  a  means  to  the  same  end,  it  takes  away  the 
ground  for  the  existence  of  these  societies  and  substitutes  a 
system  which  secures  the  same  material  results  to  the  workman 
but  fails  to  secure  the  same  educational  and  moral  ones.  To 
those  who  regard  these  educational  and  moral  results  as  a  chief 
advantage  in  voluntary  saving,  the  change  to  a  compulsory 
system  looks  like  a  step  backward."  The  foregoing  emphasizes 
once  more  the  social  aspects  of  economic  questions.  Mere 
political  expediency  may,  of  course,  give  its  hearty  approval 
to  governmental  schemes  aiming  to  secure  at  once  by  com- 
pulsion what  the  gradual  evolution  of  social  morality  would 
bring  about  in  due  course  of  time.  Hadley  has  admirably 
summed  up  the  objections  to  compulsory  thrift  in  any  form  in 
the  following  sentences,  which  afford  a  much  more  concise  and 
better  explanation  than  could  any  words  of  mine: 

"  Finally,  there  is  a  danger  that  the  apparent  advantages  of 
an  insurance  system  of  this  kind  may  blind  public  opinion  to  the 

71 


INSURANCE   ECONOMICS 

more  real  advantages  of  better  forms  of  insurance.  A  certain 
section  of  the  public  is  so  dazzled  by  the  prospect  of  pensions 
that  it  overlooks  the  true  ground  on  which  pensions  are  justified. 
It  comes  to  regard  the  pension  as  an  end  in  itself  rather  than  as 
a  means  of  relieving  the  general  funds  of  the  government  of  a 

burden There  are  certain  things  which  society  must  do  in 

justice  to  itself,  which  it  cannot  safely  allow  individuals  to  de- 
mand in  justice  to  themselves.  If  you  give  every  man  a  right 
to  a  pension  when  he  is  incapable  of  self-support,  you  tacitly 
approve  his  failure  to  provide  for  himself  and  his  children.  .  .  .  We 
need  measures  which  shall  increase  individual  responsibility 
rather  than  diminish  it;  measures  which  shall  give  us  more 
self-reliance  and  less  reliance  oh  society  as  a  whole.  We  can- 
not afford  to  countenance  a  system  of  morals  or  law  which 
justifies  the  individual  in  looking  to  the  community  rather 
than  to  himself  for  support  in  age  or  infirmity." 

Economic  Aspec'i:s  op  Speculation. 

Aside  from  these  considerations  of  insurance  in  its  relation 
to  economic  responsibility,  Hadley  includes  a  brief  reference 
to  insurance  in  his  discussion  of  the  economic  aspects  of  spec- 
ulation. Distinguishing  clearly  at  the  outset  insurance  from 
gambling,  and  holding  that  the  motives  and  effects  in  the 
two  are  wholly  different,  he  points  out: 

**  The  man  who  wins  in  betting  on  horses  secures  an  addition 
to  his  income  which  means  increased  luxury;  the  man  who  has 
insured  a  house  that  burns  down  prevents  the  distress  to  his 
family  consequent  upon  the  loss  of  a  home.  In  like  manner, 
the  man  who  has  insured  his  life  makes  small  annual  payments 
at  a  time  when  he  can  do  so  without  encroaching  on  the  comfort 
of  his  family;  thereby  assuring  to  that  family,  in  the  event 
of  his  death,  a  payment  of  money  at  a  time  when  the  loss  of  the 
earning  power  of  its  head  might  otherwise  mean  want  and 
destitution.  Insurance  puts  money  where  it  is  needed,  instead 
of  putting  it  where  it  is  not  needed;  where  it  has  the  highest 
utility  to  the  individual  and  to  society,  instead  of  the  lowest; 
where  the  possibility  of  securing  it,  instead  of  being  a  means 
of  demoralizing  excitement,  becomes  a  source  of  security  and 
of  industrial  efficiency.  Hence  the  insurance  company  in  pro- 
tecting the  individual  insurer  against  losses  to  himself  and  his 
family  from   fire,   accident,   or   death,     is   rendering   a   public 

72 


INSURANCE   ECONOMICS 

service ;  and  the  profits  of  such  a  company,  unlike  those  of  the 
bookmaker  or  the  lottery,  are  honestly  earned  by  an  actual 
contribution  to  the  public  wealth." 

The  economic  function  of  insurance  is  admirably  defined  in 
the  preceding  quotation,  emphasizing  the  high  degree  of  utility 
inherent  in  the  method  as  a  device  making  for  social  and  econ- 
omic security.  As  concrete  illustrations,  Hadley  refers  to 
manufacturers'  mutual  insurance  companies,  which  by  seeking 
to  reduce  losses  by  avoiding  all  preventable  causes  of  fire,  have 
succeeded  to  an  astonishing  degree,  while  associations  for  boiler 
inspections  have  been  far  more  successful  in  the  exercise  of  their 
vigilance  than  could  possibly  be  expected  from  public  officials. 

Insurance  and  Gambling  Contrasted. 

More  recent  writers  on  economics  have  given  equally  ex- 
tended consideration  to  insurance,  with  special  reference  to  its 
practical  utility  as  an  aid  in  the  solution  of  economic  questions. 
Prof.  Frank  A.  Fetter,  writing  in  1904,  contrasts  insurance 
with  gambling  and  speculative  profits,  calling  particular  atten- 
tion to  the  element  of  chance  inherent  in  all  individual  enter- 
prise.    He  remarks: 

"A  general  average  of  chances  in  different  lines  of  business 
causes  some  to  be  called  safe,  others  extra-hazardous.  The 
chance  is  averaged  and  added  to  the  profit  or  gain  of  that  in- 
dustry, for  an  extra-hazardous  industry  must  in  general  afford 
a  higher  average  of  profit  in  order  to  induce  men  to  engage  in 
it.  It  is  folly  to  take  a  risk  without  ascertaining  its  degree, 
so  far  as  general  experience  enables  one  to  choose.  But  inas- 
much and  in  as  far  as  the  gains  and  losses  fall  unequally  upon 
different  individuals,  income  depends  on  chance."  (The  Principles 
of  Economics,  p.  334) 

From  this  point  of  view  he  defines  gambling  as  a  transfer 
of  wealth  on  the  outcome  of  events  absolutely  unpredictable, 
which,  of  course,  is  the  very  antithesis  to  the  practice  of  insur- 
ance. It  is  true,  of  course,  that  legitimate  forms  of  chance  in 
risk  taking,  according  to  Fetter,  shade  off  into  illegitimate 
forms  of  gambling,  but  it  is  an  error  to  insist  upon  the  gambling 

7Z 


INSURANCE   ECONOMICS 

aspects  of  insurance  undertakings,  since  the  sole  object  of 
insurance  is  the  equaHzing  and  ehminating  of  the  element  of 
chance  in  human  affairs.  Fetter  observes  very  properly  with 
reference  to  this  important  point,  after  a  brief  consideration 
of  the  decidedly  rtiore  hazardous  form  of  insurance  under- 
writing in  the  middle  ages,  that: 

"  Gradually  there  came  about  a  specialization  of  risk- 
taking  by  the  men  most  able  to  bear  it.  They  could  tell  by 
experience  about  what  was  the  degree  of  uncertainty,  and  could 
lay  their  wagers  accordingly.  When  several  insurers  were  in 
the  same  business,  competition  forced  them  to  insure  the  vessel 
and  cargo  of  the  ordinary  trader  for  something  near  the  per- 
centage of  risk  involved.  The  insurance  thus  tended  to  become 
a  mutual  protection  to  the  ship-owners;  what  had  to  be  paid 
in  premiums  to  cover  risk  came  to  be  counted  as  part  of  the  cost 
of  carrying  on  that  business." 

To  the  foregoing  he  adds  that  modem  insurance  is  mutual 
in  nearly  every  case,  and  that  the  total  premiums  equal  the 
total  losses  plus  operating  expenses,  the  interest  on  the  reserve 
of  premiums  counting  as  part  of  the  premium.  He,  therefore, 
concludes : 

"  Each  one  gets  protection  for  the  loss  of  his  property  in 
return  for  the  payment  of  a  sum  that  will  cover  the  losses  on 
others'  property.  Such  an  exchange  is  a  profitable  one.  The 
premium  comes  from  marginal  income;  the  loss  of  house  or 
property  would  fall  upon  the  parts  of  income  having  higher 
marginal  utility.  The  less  urgent  wants  of  the  present  are 
sacrificed  in  order  to  protect  the  income  that  gratifies  the  more 
urgent  wants  of  the  future.  In  insurance  each  party  gives  a 
smaller  utility  for  a  greater ;  each  has  a  margin  of  advantage ; 
while  the  greater  certainty  in  business  stimulates  effort  and 
rewards  it.  This  is  quite  the  opposite  of  the  working  of  betting 
and  gambling." 

Relation  op  Insurance  to  Money,  Credit,  Trade 
AND  Transportation. 

In  1905,  Prof.  Edwin  R.  A.  Seligman  published  a  treatise 
on  the  "Principles  of  Economics,"  with  special  reference  to 

74 


INSURANCE    ECONOMICS 

American  conditions,  in  which  he  defines  among  others  the 
structure  and  process  of  economic  Hfe.  In  his  consideration 
of  value  and  exchange — that  is,  money,  credit,  international 
trade,  and  transportation — he  properly  includes  insurance, 
with  a  brief  discussion  of  its  nature,  growth,  theory,  and 
methods  of  public  regulation.  He  defines  insurance  as  a  de- 
vice to  remove  the  economic  consequences  of  uncertainty,  and 
remarks  that,  "the  risk  with  which  economic  activity  com- 
monly concerns  itself  is  the  degree  of  uncertainty  rather  than 
the  degree  of  probability."  He  follows  this  definition  with 
the  conclusion  that,"  The  need  of  protection  against  risk  grows, 
therefore,  with  the  degree  of  uncertainty  which  in  economic 
actions  increases  as  probability  increases."  Uncertainty,  he 
points  out,  is  clearly  a  disadvantage,  which  every  prudent 
man  desires  as  far  as  possible  to  eliminate,  and  this  can  be 
accomplished  in  three  ways — first,  by  avoidance;  second,  by 
prevention;  and  third,  by  assumption  of  risk.  The  entire  risk, 
of  course,  may  be  assumed,  but  it  is  possible  to  reduce  it  by  com- 
bining with  others  into  a  group  and  by  distributing  the  losses 
to  the  group  as  a  whole.  In  this  way,  according  to  Seligman, 
certainty  is  substituted  for  uncertainty,  and  this  method  of 
combination  is  called  insurance.  The  essence  of  insurance,  he 
explains,  is  the  effort  to  diminish  the  risk  of  uncertainty,  and 
considered  from  this  point  of  view,  "  Insurance  is  productive, 
that  is,  it  involves  an  increase  of  wealth,  because  it  lessens 
the  social  costs  of  risks."  He  is  careful  to  explain  that  we  must 
not  confuse  the  loss  due  to  uncertainty  with  the  loss  due  to 
the  occurrence  itself,  for  he  remarks  that: 

"  The  occurrence  is  bound  to  happen.  Death  will  come,  fire 
will  consume,  the  tornado  will  strike.  In  some  cases  the  prob- 
ability of  the  occurrence  or  the  amount  of  the  loss  may  indeed 
be  somewhat  lessened  by  preventive  action.  A  good  police  force 
will  diminish  burglary,  an  efficient  fire  department  and  a  good 
building  code  will  decrease  fire  losses,  carefully  devised  factory 
laws  will  lessen  accidents.  In  all  these  cases,  however,  we  have 
to  deal  with  prevention,  not  with  insurance.  Insurance  takes 
the  fact  itself  for  granted;  it  does  nothing  to  eliminate     the 

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INSURANCE    ECONOMICS 

occurrence.  The  loss  is  hence  the  same,  whether  we  have  insur- 
ance or  not ;  the  house  is  burned  and  there  is  less  wealth  than 
before." 

The  Compensation  Required  for  Risk. 

There  is,  of  course,  in  all  cases  an  additional  loss  due 
not  to  the  occurrence  itself,  but  to  the  uncertainty,  and  this, 
according  to  Seligman,  can  best  be  observed  in  the  investment 
of  capital.  The  ordinary  man  will  not  assume  risk  unless,  he 
is  remunerated  for  it.  When  a  capitalist  loans  funds  and  there 
is  any  special  degree  of  risk  connected  with  the  transaction, 
it  is  a  familiar  fact  that  he  will  increase  the  rate  of  interest 
by  a  corresponding  amount.  This  increase  in  the  interest 
rate  is  an  addition  to  the  expenses  of  the  borrower.  To  the 
extent,  therefore,  that  insurance  diminishes  risk  or  uncertainty 
in  commercial  enterprise  the  ultimate  cost  of  the  product, 
or  the  price  ultimately  charged  to  the  consumer,  is  corres- 
pondingly reduced,  or  in  the  words  of  Seligman,  "if  the  uncer- 
tainty could  be  eliminated,  the  price  of  the  commodity  would 
be  lower  and  there  would  be  a  corresponding  gain  to  the  com- 
munity as  a  whole."  Since  insurance  performs  this  function 
by  minimizing  uncertainty,  it  is  accordingly  a  factor  in  the 
production  of  wealth. 

Factors  in  the  Cost  of  Production. 

The  practical  importance  of  this  consideration  cannot 
easily  be  over-estimated.  No  writer  previous  to  Seligman  has 
so  clearly  defined  the  economic  function  of  insurance  as  an 
element  in  the  cost  of  production.     In  his  own  words, 

"  Like  transportation,  insurance  falls  under  the  head  of 
exchange  of  wealth,  while  exchange,  as  we  know,  is  itself  a 
species  of  production.  Improved  transportation  reduces  the  cost 
of  having  a  commodity  in  one  place  become  a  more  valuable 
commodity  in  another  place;  improved  insurance  reduces  the 
cost  of  having  the  uncertainty  of  the  future  change  into  the  more 
valuable  certainty  of  the  present.  Transportation  overcomes 
the  disadvantages  of  space ;  insurance  overcomes  the  disadvan- 

76 


INSURANCE   ECONOMICS 

tages  of  time.  Transportation  is  productive  because  it  increases 
space  utilities;  insurance  is  productive  because  it  increases  time 
utilities." 

In  continuation,  he  answers  the  question  as  to  how  insurance 
minimizes  uncertainty,  in  the  statement  that: 

**  The  answer  is,  through  the  combination  of  risks.  This 
is  a  result  of  the  law  of  probabilities.  If  we  have  accurate 
statistics  of  fires,  for  example,  for  a  term  of  years  and  take  the 
number  of  fires  with  a  given  number  of  houses  during  that 
period,  we  get  an  average.  If  the  figures  in  any  year  correspond 
exactly  to  the  average,  there  would  be  a  certainty  in  the  number 
of  fires,  and  the  only  uncertainty  would  be  as  to  which  house 
would  burn.  In  point  of  fact,  however,  in  any  particular  year 
there  will  be  a  variation  from  the  average.  According  to  a 
well-established  law,  the  probable  variation  increases  only  as 
the  square  root  of  the  number  of  cases.  If  there  are  a  hundred 
times  as  many  houses,  there  will  be  only  ten  times  as  much 
probable  variation  from  the  average  loss.  Hence  the  larger 
the  number  of  cases,  the  less  will  be  the  certainty  as  to  the 
amount  of  loss  which  will  be  borne  by  the  group  as  a  whole. 
Insurance  combines  the  risk  into  a  group,  and  thus  reduces  the 
element  of  uncertainty.  The  risk  of  the  group  is  less  than  the 
sum  of  the  risks  of  the  individuals  who  form  the  group." 

Fallacies  of  Self-Insurance. 

He  also  disposes  of  the  alternative  of  so-called  self-insurance 
by  pointing  out  that  only  an  immense  corporation  may  practice 
self-insurance  with  a  better  chance  of  success  than  a  corporation 
organized  for  that  purpose.     He  concludes: 

"  The  great  benefit  of  an  insurance  company  is  not  only 
that  the  risks  are  combined,  but  also  that  they  are  transferred 
to  a  class  who  can  afford  to  make  a  special  study  of  the  prob- 
lem, and  who  can  thus  reduce  the  cost  of  insurance  by  displaying 
their  ability  to  estimate  uncertainties.  Whether  the  company 
is  a  stock  corporation  or  a  mutual  company  is  of  importance 
only  as  to  the  ultimate  distribution  of  the  profits  of  the  enter- 
prise; in  one  case,  as  in  the  other,  however,  the  management 
of  the  business  is  confided  to  a  class  of  experts.  The  more 
adept  the  insurance  companies,  and  the  more  scientific  their 
methods,   the  closer  will  be  the  correspondence  between  the 

77 


INSURANCE    ECONOMICS 

" '       ■) 

preparation  for,  and  the  fact  of  loss  and  the  smaller  will  be 
the  accumulation  of  the  necessary  insurance  fund,  the  lower 
will  be  the  insurance  premium,  and  the  greater  will  be  the  net 
gain  to  the  community.  Insurance  properly  conducted  is  the 
opposite  of  gambling.  If  any  one  takes  out  an  insurance  policy, 
he  frees  himself  from  an  existing  uncertainty  and  transfers  the 
risk  to  some  one  who  is  more  qualified  and  ready  to  assume  it ; 
if  he  makes  a  wager  with  another,  the  newly  created  uncer- 
tainty attaches  to  both.  Insurance  is  the  transfer  and  reduc- 
tion of  risk;  gambling  is  the  creation  and  increase  of  risk." 

Excepting  Mr.  Allan  H.  Willett,  whose  dissertation  on  the 
theory  of  risk  and  insurance  will  be  subsequently  referred  to, 
Seligman,  more  than  any  other  recent  writer,  has  measurably 
advanced  the  theoretical  discussion  of  the  subject. 

Relation  of  Insurance  to  Interest  and  Profit. 

Long  previous  to  Seligman,  Prof.  Richard  T.  Ely  had 
considered  insurance  as  an  element  in  social  economics,  but 
rather  as  a  factor  making  for  social  efficiency  and  social  progress 
than  as  a  distinct  element  in  economic  theory.  In  his  "Outlines 
of  Economics,"  published  in  1905,  Ely,  however,  considers 
insurance  in  its  relation  to  interest  and  profits,  defining 
the  elements  of  gross  profits  as  replacement  of  capital,  insur- 
ance, interest,  wages  of  superintendence,  and  pure  profit.  The 
second  element  is  necessarily  the  payment  for  risk  incurred 
in  commercial  enterprise.  Insurance  as  thus  defined  may  not 
necessarily  be  the  payment  of  an  insurance  premium  to  an 
insurance  corporation,  but  merely  the  higher  rate  of  interest 
paid  for  capital  borrowed  to  carry  on  a  particularly  hazardous 
undertaking.  Ely  also  considers  insurance  with  reference  to 
consumption  and  saving.  Probably  no  other  function  in  modem 
society  serves  so  distinctively  the  purpose  of  increasing  capital 
as  insurance,  which  requires  the  accumulation  of  enormous 
sums  as  security,  with  the  condition  that  such  sums  must 
be  safely  invested  and  yield  a  proper  rate  of  interest.  In  life 
insurance  the  inducement  to  save  periodically  or  systematically 
sums,  however   small,    which  would  otherwise   be  wasted,   or 

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INSURANCE   ECONOMICS 

which  in  any  event  would  not  be  converted  into  capital,  con- 
tributes as  much,  if  not  more  than  any  other  method  of  savings 
or  investment  to  the  increase  in  the  national  wealth.  Ely  refers 
to  this  relatively  modem  institution  as  one  of  the  most  valu- 
able factors  in  our  economic  civilization,  and  remarks: 

"  It  has  the  great  merit  of  providing  in  varying  proportions 
for  both  security  and  profit  of  investment.  The  provision  for 
security  is  especially  prominent  in  the  case  of  fire  insurance 
It  is  often  said  that  such  an  insurance  is  simply  an  equalization 
of  losses,  or  a  distribution  of  a  heavy  sudden  loss  over  a  long 
period  of  time.  In  fact,  it  is  much  more  than  that.  It  is  im- 
portant to  take  the  amount  of  loss  from  a  business  in  such 
amounts  and  at  such  times  that  no  vital  want  is  left  unsatisfied, 
and  this  is  done  by  insurance.  Thus  perpetuity  and  equality 
of  conditions  is  guaranteed  to  a  business  in  such  a  way  as  to 
greatly  encourage  investment.  The  same  principle  applies  to 
life  insurance.  The  death  of  a  business  man  is  often  a  more 
serious  shock  to  a  business  than  a  conflagration.  The  payment 
of  a  life  insurance  policy  is  often  a  very  great  relief  to  the  financial 
embarrassments  in  which  such  a  business  is  left." 

While  this  discussion  is  more  with  reference  to  the  social 
aspects  of  insurance,  it  also  has  a  decided  practical  bearing 
upon  the  discussion  of  insurance  as  an  element  of  economics. 
Economics,  as  Ely  observes,  is,  after  all,  a  science  of  man. 
It  is  continuously  a  question  of  human  wants  and  needs,  and 
the  means  and  methods  most  productive  to  bring  about  a 
satisfaction  of  human  desires  at  lowest  cost.  Without  entering 
upon  a  discussion  as  to  the  distinction  which  requires  to  be 
made  in  economics  between  value  and  utility,  it  is  self-evident 
that  insurance  is  of  the  highest  utility,  because  it  satisfies  to 
so  large  a  degree,  and  in  so  effective  a  manner,  the  human 
wants  and  needs,  by  eliminating  the  inherent  insecurity  in 
business  enterprise  as  well  as  in  the  duration  of  human  Hfe. 

The  Accumulation  and  Conservation  of  Capital. 

The  full  significance  of  the  economic  function  of  insurance 
becomes  apparent  only  when  it  is  considered  how  enormously 
insurance  aids  in  the  accumulation  of  capital.     Not  only  does 

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INSURANCE    ECONOMICS 

insurance  aid  in  the  accumulation  of  capital  by  the  aggregation 
of  the  vast  funds  which  constitute  the  security  of  the  insured, 
but  it  aids  further  in  the  conservation  of  capital  by  the  en- 
couragement which  it  gives,  and  compulsion,  so  to  speak, 
which  it  exercises  in  systematizing  the  thrift  function  of  the 
people.  The  assets  of  American  life  insurance  companies  alone 
in  1909  amounted  to  $3,643,858,000,  consisting  chiefly  of 
$2,700,190,000  invested  in  the  bonds  of  transportation 
companies  and  in  real  estate  mortgages;  and  $312,273,000 
invested  in  other  securities  of  this  kind.  A  theoretical 
consideration  of  the  whole  question  of  the  nature  and  function 

(of  capital  and  income  would  be  required  precisely  to  indicate 
the  function  which  insurance  performs  in  modern  public  and 
private  finance.  One  of  the  most  valuable  contributions  to 
this  discussion  is  the  treatise  by  Prof.  Irving  Fisher,  on  the 
Nature  of  Capital  and  Income,  published  in  1906,  which 
properly  includes  a  discussion  of  insurance  in  its  relation  to 
the  question  of  risk  and  its  assumption  in  the  investments  of 
capitalists.     In  the  words  of  Fisher: 

'*  Business  men  try  not  only  to  estimate  the  risks  which 
they  must  encounter  and  to  adjust  their  accounts  accordingly, 
but  they  also  endeaver  to  avoid  such  risks  altogether.  This 
follows  from  the  existence  of  the  factor  of  caution.  Where  the 
coefficient  of  caution  is  abnormal,  amounting  to  incaution, 
risks  are  not  avoided,  but  are  expressly  sought,  and  the  phe- 
nomena of  gambling  and  indiscriminate  speculation  are  the 
result.  But  in  the  great  majority  of  men  there  exists  a  healthy 
fear  of  risks,  and  in  consequence  a  tendency  to  avoid  or  reduce 
them." 
N^  The  Reduction  of  Risk  by  Insurance. 

Fisher  explains  that  there  are  five  principal  ways  in  which 
risk  may  be  reduced,  that  is:  (i)  By  increasing  guaranties  for 
the  performance  of  contracts;  (2)  by  increasing  safeguards 
against  incurring  losses;  (3)  by  increasing  foresight  and  thereby 
diminishing  the  risks;  (4)  by  insurance,  that  is,  by  consoHdating 
risks;  and  (5)  by  throwing  risks  into  the  hands  of  a  special 
class  of  speculators. 

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INSURANCE   ECONOMICS 

Considering  the  means  of  avoiding  and  shifting  risks  by 
insurance,  Fisher  remarks: 

**  Insurance  involves  the  offsetting  of  one  risk  by  another; 
that  is,  the  consolidation  of  a  large  number  of  chances  whereby 
relative  certainty  is,  as  it  were,  manufactured  out  of  uncer- 
tainty. To  illustrate  this,  let  us  suppose  that  10,000  houses 
of  the  same  kind  are  too  distant  from  each  other  to  be  destroyed 
by  the  same  fire,  and  let  us  suppose  that  these  houses  in  the 
average  would  be  worth  $10,000  each  were  it  not  for  the  risk 
of  fire;  in  other  words,  that  $10,000  is  the  capitalized  value  of 
the  services  to  be  rendered  by  each  house,  assuming  that  it 
lives  out  its  natural  life.  The  value  of  the  total  number  of 
houses  would  then  be  $100,000,000.  This  is  the  "riskless  value." 
It  is  the  capitalized  value  of  the  income  which  the  10,000  houses 
would  bring  in,  were  there  no  loss  by  fire.  If  interest  is  at  5  per 
cent.,  the  income  which  is  thus  capitalized  is  $5,000,000  a  year. 
If  now  we  suppose  that  the  annual  risk  of  fire  is  one  chance  in 
200,  there  will  be  about  50  houses  annually  burned.  Reckoning 
the  value  thus  destroyed  at  an  average  of  $10,000  for  each 
house,  there  will  be  $500,000  annually  lost  by  fire.  We  must 
now  deduct  this  from  the  $5,000,000,  which  would  be  the  income 
were  it  not  for  fires.  We  have  left  $4,500,000,  the  capitalization 
of  which  is  only  $90,000,000.  In  other  words,  the  total  property 
of  10,000  houses  is  worth  in  "mathematical  value"  $90,000,000 
instead  of  $100,000,000,  the  reduction  being  because  of  the 
prospect  of  fires.  If  we  suppose  all  of  these  houses  to  be  owned 
by  one  corporation,  this  mathematical  value  of  $90,000,000 
might  also  be  the  actual  value,  for  such  a  corporation  could 
count  on  about  50  houses  burning  annually  almost  as  a  certainty. 
Each  house  would  then  be  worth,  on  an  average,  $9,000.  But 
if  such  an  individual  house  is  owned  by  an  individual  person, 
this  mathematical  value  would  not  be  its  "commercial  value," 
on  account  of  the  element  of  caution.  Let  us  say  that  the 
caution  coefficient  is  7-9,  in  which  case  the  house  would  be 
worth  $7,000.  In  other  words,  we  have  $10,000  as  the  "risk- 
less"  value  of  the  house,  $9,000  as  its  "mathematical  "  value, 
and  $7,000  as  its  actual  "commercial  "  value,  assuming  that 
there  is  not  as  yet  insurance.  Now  if  the  owner  of  such  a  house 
could  secure  insurance  on  a  purely  mathematical  basis  of  the 
risk,  which,  as  we  have  seen,  is  one-half  of  one  per  cent.,  and, 
therefore,  could  pay  only  $50  per  annum,  in  consideration  of 
which  the  value  of  his  house,  if  destroyed  by  fire,  is  restored 

8x 


INSURANCE   ECONOMICS 

to  him,  it  is  evident  that  he  has  made  a  good  investment;  for 
he  is  now  assured  of  a  house  even  should  a  fire  occur,  and  he  has, 
instead  of  the  risk  of  fire,  merely  to  pay  his  annual  premium  of 
$50  a  year,  the  capitalized  value  of  which  is  $1,000.  Conse- 
quently, his  house  is  worth  $10,000 — $1,000,  or  $9,000. 

"Such  an  insurance  rate,  however,  being  based  on  the 
mathematical  or  "pure"  premiums,  would  not  pay  any  profit 
to  the  companies  conducting  it.  But  even  a  higher  insurance 
would  leave  a  large  margin  of  capital-value  saved  to  the  insured. 
If  we  suppose  a  "loading,"  so  that  the  insurance  premium  is 
not  $50,  but  $100,  similar  reasoning  would  show  that  the  value 
of  the  house  when  insured  would  be  to  the  owner  $8,000  instead 
of  $7,000.  As  long  as  the  loading  is  not  sufficient  to  absorb  all 
the  margin  between  the  $7,000  and  $9,000,  it  will  be  advan- 
tageous to  insure." 

^^  The  Protection  op  Income  by  Insurance. 

Prof.  Fisher  emphasizes  the  advantages  of  insurance,  with 
particular  reference  to  conserving  and  equalizing  the  income 
from  property,  and  he  illustrates  his  views  by  the  statement 
that: 

"  The  owner  of  the  house  in  question  would  receive,  if  it 
were  not  insured,  a  net  annual  income,  after  providing  for 
depreciation,  of  five  per  cent,  on  $10,000,  or  $500  a  year  until 
the  house  was  burned,  after  which  he  would  receive  nothing; 
whereas,  if  he  insures,  he  receives  this  $500  income  less  his 
premium  up  to  the  date  of  the  fire,  and  afterward  the  income 
from  the  indemnity  paid  him  by  the  company." 

What  is  true  of  fire  insurance  is  equally  true  of  other  forms 
of  insurance,  and  Fisher  observes,  with  particular  reference 
to  life  insurance,  that,  like  the  other  forms,  it  tends  to  steady 
the  income  of  the  beneficiary.     He  states: 

"  If  a  wife  holds  insurance  on  her  husband's  life,  the  con- 
sequence is  that,  although  what  he  gives  her  during  his  life  is 
somewhat  diminished,  her  income  will  not  suddenly  cease  at 
his  death.  The  tendency  of  insurance  here  as  elsewhere  is  to 
make  regularity  out  of  irregularity,  relative  certainty  out  of 
relative  uncertainty;  and  where,  under  the  form  of  insurance 
contracts,  the  opposite  result  follows,  the  case  is  not  one  of 
true  insurance,  but  tends  to  become  one  of  gambling." 

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INSURANCE   ECONOMICS 

It  is  hardly  necessary  to  point  out  that  the  distinction 
between  insurance  and  gambHng  has  been  made  so  clear  by  those 
who  have  written  upon  the  subject  that  it  requires  no  further 
analysis.  It  is  manifestly  to  the  interest  of  insurance  com- 
panies to  discourage  every  form  of  adverse  selection,  or  in 
other  words,  attempts  to  gain  in  an  illegitimate  manner  by  a 
method  designed  solely  for  the  equalization  of  normal  losses. 
Any  attempt  to  pervert  insurance  from  its  legitimate  function, 
and  to  afford  opportunities  for  speculation  and  fraud,  would 
divert  the  system  into  one  of  gambling  and  make  it  more  or  less 
contrary  to  public  policy. 

Considerations  of  Insurance  Law. 

A  very  interesting  contribution  to  the  economic  aspects 
of  insurance  is  contained  in  a  work  entitled,  **0n  the  Civic 
Relations,"  by  Henry  Holt,  published  in  1907.  Mr.  Holt 
includes  insurance  in  his  discussion  of  the  law  of  personal 
property  contracts,*  observing  that: 

"  Suretyship  and  warranty  shade  into  another  large  class  of 
contracts  embracing  all  kinds  of  insurance.  Fidelity  insurance 
is  especially  like  suretyship,  but  also  fire,  marine,  accident,  life, 
plate-glass  and  all  the  rest,  are  of  course  of  the  nature  of 
warranty;  but  the  warrant  extends,  unless  otherwise  agreed 
in  the  policy,  not  necessarily  to  the  full  amount  of  the  policy, 
but  only  to  the  value  of  the  property  at  the  time  of  loss.  Hence 
the  desirability  of  keeping  the  policy  small,  or  having  it  declare 
that  the  amount  insured  for  shall,  in  case  of  loss,  be  taken  as 
the  value  of  the  property.  Life-insurance  companies,  however; 
are  always  liable  for  the  full  amount  of  their  policies." 

The  Place  of  Insurance  in  the  Law  Merchant. 

The  law  of  insurance  is  very  largely  the  law  of  contracts 
and  from  the  earliest  times  it  has  been  a  part  of  the  law 
merchant.  The  decision  of  the  supreme  court  that  insurance 
is  not  an  element  of  commerce,  is  not  sustained  by  the  actual 


*  For  a  full  discussion  of  the  law  of  insurance  as  within  the  scope 
of  personal  property  contracts,  see  Kent's  "  Commentaries,"  Vol.  III. 

as 


INSURANCE   ECONOMICS 

facts  of  insurance  history  and  the  historical  development  of 
the  insurance  contract  out  of  the  earliest  forms  of  bottomry- 
loans.  Distinguishing  clearly  between  the  principle  of  insurance, 
as  such,  and  the  application  of  the  principle  to  actual 
practice,  it  requires  no  extended  research  into  the  history 
of  commerce  to  prove  that  the  development  of  the  principle 
is  practically  coincident  with  the  progress  of  navigation  and 
national  and  international  commercial  intercourse.  Distinguish- 
ing further  between  the  earliest  form  of  underwriting — that  is, 
long  before  the  business  was  conducted  by  corporations — 
insurance  was  in  its  origin  as  much  a  matter  of  business  enter- 
prise as  any  other  branch  of  trade.  In  fact,  one  of  the  earlier 
legal  definitions  of  insurance  emphasizes  this  point  precisely 
when,  for  illustration,  John  Millar,  in  his  "Elements  of  the 
Law  Relating  to  Insurances,"  published  in  Edinburgh  in  1787 
defines  insurance  -.'S  **  a  contract  by  which  one  man,  for  a  con- 
sideration received,  becomes  liable  for  the  loss  arising  to  another 
from  any  specified  contingency."  While  this  form  of  under- 
writing has  never  been  very  general  in  this  country,  it  prevailed 
quite  extensively  previous  to  the  second  war  with  England, 
although  by  that  time  the  business  of  the  Insurance  Company 
of  North  America,  and  other  insurance  corporations  had 
attained   to   considerable  proportions. 

^  The  Place  of  Insurance  in  the  Industrial  System. 

It  would  manifestly  unduly  enlarge  this  discussion  to  con- 
sider all  the  numerous  authorities  on  economics  who  have  inci- 
dentally referred  to  the  subject.  The  practice  of  insurance 
is  so  intimately  interwoven  with  the  whole  fabric  of  modem 
business  life,  that  Mr  J.  A.  Hobson  has  very  properly  included 
insurance  in  his  elaborate  outline  of  the  industrial  system, 
with  special  reference  to  earned  and  unearned  incomes.  Accord- 
ing to  Hobson,  insurance  produces  four  utilities:  (i)  reducing 
the  pain  or  subjective  injury  of  an  accident,  (2)  producing  a 
sense  of  security,  (3)  evoking  productive  energy,  (4)  preventing 
objective  waste.     He  very  properly  observes  that,   "  No  de- 

84 


INSURANCE   ECONOMICS 

scription  of  the  outlines  of  modem  industry  would  be  complete 
without  reference  to  the  business  of  insurance,  which  is  so 
intimately  associated  with  finance."  Of  particular  importance, 
however,  is  the  part  which  insurance  plays  in  the  industrial 
system  as  an  instrument  for  producing  and  distributing  goods 
and  services.  In  answer  to  the  question  as  to  what  insurance 
produces,  Hobson  remarks  that: 

**  We  can  best  formulate  our  answer  by  first  putting  another 
question,  viz..  What  damage  would  be  done  if  there  were  no 
insurance  ?  The  life  of  a  producer  often  comes  to  a  sudden  end ; 
if  no  provision  were  made  for  securing  to  those  dependent  on 
him  a  continuance  of  at  least  a  part  of  the  income  he  earned 
when  alive,  they  must  sink  suddenly  into  a  lower  standard  of 
living,  perhaps  into  penury,  and  both  their  happiness  and  their 
present  or  future  efficiency  as  producers  might  be  greatly  im- 
paired. By  paying  a  comparatively  small  sum  over  a  long  term 
of  years,  which  involves  the  habitual  deprivation  of  what,  if 
expended  otherwise,  would  constitute  the  least  useful  and  pleas- 
urable part  of  his  whole  expenditure,  he  is  enabled  to  avert 
a  certain  damage  of  a  serious  kind  affecting  the  comforts,  con- 
veniences, or  even  the  necessaries  in  the  standard  of  life  of  his 
family.  What  insurance  here  produces  is  evidently  the  differ- 
ence in  disutility  between  the  sum  of  the  small  losses  involved 
in  the  payment  of  the  yearly  premiums  and  the  great  loss 
involved  in  the  sudden  total  withdrawal  of  the  whole  or  a  large 
part  of  the  family  income.  The  substitution  of  the  former  small 
disutility  or  cost  for  the  latter  large  one  is  in  effect  the  pro- 
duction of  so  much  utility,  not  merely  from  the  standpoint 
of  the  individual  but  from  that  of  the  society  to  which  he 
belongs.  It  causes,  directly,  no  increase  of  concrete  goods  or 
services,  but  by  assisting  a  more  equitable  distribution  over 
time  of  the  aggregate  of  such  objective  wealth,  it  causes  more 
to  be  got  out  of  it  in  satisfaction  and  in  subjective  utility 
In  averting  a  damage  to  the  productive  power  of  industry  by  a 
sudden  loss  of  family  income  insurance  may  also  be  considered 
as  directly  productive  of  industrial  energy." 

'sThe  Protection  of  Property   and  Wealth  by  Insurance. 

In  this  important  passage,  in  marked  contrast  to  the  often 
indefinite  and  inconclusive  language  of  earlier  writers  on   the 

8S 


INSURANCE   ECONOMICS 

subject,  Hobson,  better  than  any  other  writer,  emphasizes 
the  function  of  insurance  in  the  industrial  economy  of 
modem  nations,  and  in  particular  the  service  rendered  by 
insurance  in  preventing  losses  from  falling  suddenly  in  full 
force  on  business  undertakings  by  distributing  such  losses 
over  a  large  number  of  owners  and  over  a  long  period  of 
time.  He  points  out  that  the  sudden  total  destruction  of 
some  important  part  of  material  capital  may  destroy  the  whole 
efficiency  of  what  remains  and  suddenly  terminate  the  value 
of  any  given  business  ability.  By  thus  conserving  commercial 
power  insurance  renders  one  of  the  most  useful  of  services  to 
the  whole  national  economy.     In  the  words  of  Hobson: 

"  Without  insurance  the  worry  caused  by  conscious  inability 
to  provide  against  an  increasing  number  of  more  highly-appre- 
ciated risks  would  become  an  almost  intolerable  strain,  en- 
hancing the  subjective  or  human  cost  of  production  throughout 
the  business  world.  As  the  spread  of  education  and  the  stir  of 
modem  city  life  cause  larger  and  larger  numbers  of  the  workers 
to  have  more  feeling  for  the  future  of  themselves  and  their 
families,  this  extensive  and  intensive  growth  of  anxiety  is 
exhibited  in  an  immense  expansion  of  private  and  public  insur- 
ance. The  main  direct  object  of  such  insurance  is  the  produc- 
tion of  a  sense  of  security." 

In  other  words,  according  to  the  same  writer,  a  reasonable 
measure  of  security  is  essential  to  evoke  the  best  productive 
powers,  for  without  such  security  man  cannot,  and  will  not,  do 
his  best.  He  therefore  concludes  that  "  The  production  of 
security  is  therefore  a  direct  enhancement  of  productive  energy," 
and  this  would  be  impossible  without  insurance. 

The  Abstract  Theory  of  Risk  and  Insurance. 

The  foregoing  considerations  indicate  in  general  outline 
the  attention  which  leading  writers  on  economics  have  given  to 
the  subject  of  insurance.  It  is  made  clear  that  as  yet  insurance 
has  not  received  the  full  consideration,  both  theoretical  and 
practical,  of  which  it  is  deserving  as  an  element  of  economics, 
commerce   and   social   progress.      The    only    qualified   inquiry 

86 


INSURANCE   ECONOMICS 

into  the  whole  subject  is  a  treatise  by  Mr.  Allan  H.  Willett, 
on  "  The  Economic  Theory  of  Risk  and  Insurance,"  published 
in  1 90 1.  This  dissertation  is  by  far  the  most  ambitious  attempt 
to  co-ordinate  the  theory  of  risk  and  insurance  in  the  light  of 
economic  teachings  and  with  some  regard  to  practical  ex- 
perience. Insurance,  according  to  Willett,  is  defined  as  a  fund 
accumulated  to  meet  uncertain  losses,  but  more  precisely, 

"as  that  social  device  for  making  accumulations  to  meet 
uncertain  losses  of  capital  which  is  carried  out  through  the 
transfer  of  the  risks  of  many  individuals  to  one  person  or  to 
a  group  of  persons.  Wherever  there  is  accumulation  for  uncer- 
tain losses,  or  wherever  there  is  a  transfer  of  risk,  there  is  one  ele- 
ment of  insurance ;  only  where  these  are  joined  with  the  combi- 
nation of  risks  in  a  group  is  the  insurance  complete." 

Aside  from  the  advantage  resulting  from  the  combination 
of  risks,  and  the  consequent  reduction  of  uncertainty,  as  decided 
economic  benefits  resulting  from  insurance,  Willett  observes  that 
there  is  another  advantage  to  commercial  enterprise  in  that, 

"It  is  desirable  for  society  that  risks  should  be  correctly 
estimated.  Men  differ  much  in  their  ability  to  judge  them. 
The  segregation  of  the  work  of  estimating  risks  leads  to  a  differ- 
entiation of  capitalists,  as  a  result  of  which  those  who  are 
especially  adapted  to  that  task  will  be  the  ones  who  will  under- 
take it.  Moreover,  their  natural  ability  will  be  further  devel- 
oped through  the  experience  and  training  of  the  work  itself. 
On  the  other  hand,  there  are  many  men  capable  of  rendering 
good  service  to  society  in  comparatively  safe  industries,  who 
are  so  constituted  that  the  necessity  of  running  any  great 
chance  of  loss  seriously  diminishes  their  efficiency.  The  possi- 
bility of  transferring  the  risks  of  their  business  to  others  for 
a  fixed  premium  frees  them  from  the  paralyzing  influence  of 
uncertainty,  and  enables  them  to  make  the  best  use  of  their 
powers  in  other  directions.  The  gain  to  society  from  the 
transfer  of  risks  is  obtained  partly  through  the  reduction  in 
the  cost  of  carrying  the  risks  when  they  are  borne  by  those 
who  have  the  most  ability  to  estimate  them  and  the  most 
confidence  in  their  own  judgments  about  them,  and  partly 
through  the  increase  in  the  efficiency  of  those  who  are  abnor- 
mally sensitive  to  the  influence  of  uncertainty." 


insurance  economics 

The  Economic  Gain  Resulting  prom  Insurance. 

The  economic  significance  of  insurance  as  considered  from 
this  point  of  view  can  hardly  be  overestimated  in  the  case  of 
a  progressive  commercial  nation,  in  which  the  assumption  of 
widely  varying  risks,  differing  in  nature  and  degree,  is  a  first 
essential  in  business  undertakings  on  a  large  scale.  To  the 
extent  that  insurance  encourages  risk  assumption  it  aids 
materially  in  the  economic  progress  of  the  nation.  Willett 
points  out: 

"  How  great  the  gain  is,  even  under  existing  imperfect  con- 
ditions, it  is  impossible  to  estimate,  since  it  is  difficult  to  con- 
ceive how  the  large  enterprises  of  the  present  day  could  be 
carried  on  without  the  possibility  of  transferring  to  insurance 
companies  many  of  the  risks  involved  in  them.  It  could  cer- 
tainly be  done  only  on  a  much  larger  margin  of  safety  than  is 
now  considered  necessary." 

Insurance  as  an  Essential  Factor  in  the  Production 
OP  Wealth. 

In  brief,  according  to  Willett  the  treatment  of  insurance 
naturally  belongs  in  the  division  of  economic  theory  that  deals 
with  the  phenomena  of  the  production  of  wealth.  This  view 
is  in  entire  conformity  to  the  gradually  developing  conviction 
of  trained  economists  who  have  given  concern  to  the  subject 
as  an  important  branch  of  economic  inquiry.  There  has  been, 
as  might  be  expected,  and  as  pointed  out  by  Willett,  a  singular 
lack  of  unanimity  among  writers  on  economics  with  regard  to 
the  division  of  economic  theory  in  which  the  treatment  of  in- 
surance ought  to  be  placed.  I  can  not  do  better  than  con- 
clude this  inquiry  (which  I  believe  is  the  first  summary  account 
of  the  consideration  of  insurance  by  economic  writers  from 
the  time  of  Adam  Smith  to  the  present  day)  by  quoting  the 
concluding  paragraph  of  the  discussion  by  Willett: 

"  Some  have  considered  it  in  connection  with  production, 
others  have  regarded  it  as  a  phenomenon  of  consumption,  while 
still  others  have  found  it  inexpedient  to  bring  it  under  any  of 
the  recognized  divisions,  and  have  put  it  at  the  end  of  their 

86 


INSURANCE   ECONOMICS 

works  along  with  other  subjects  of  a  more  or  less  dubious 
economic  character.  There  seems  to  be  little  occasion  for  such 
uncertainty.  If  the  old  divisions  of  production,  distribution, 
exchange  and  consumption  are  to  be  maintained,  there  is  no 
doubt  that  the  proper  place  for  the  discussion  of  insurance, 
at  least  so  far  as  insurance  of  capital  is  concerned,  is  in  the 
department  of  production.  With  regard  to  the  insurance  of 
consumption  goods  the  case  may  not  seem  so  plain  at  first 
sight,  since  there  is  not  the  same  direct  relation  between  such 
insurance  and  the  productivity  of  industry.  Nevertheless,  it 
undoubtedly  belongs  in  the  division  of  production.  It  belongs 
there,  not  because  it  affects  the  productivity  of  other  capital, 
but  because  the  creation  of  security  is  in  itself  a  form  of  pro- 
duction. If  the  owners  of  consumption  goods  are  willing  to 
pay  a  price  for  the  sake  of  having  them  insured,  it  is  evident 
that  they  are  obtaining  something  in  exchange  which  is  of  more 
value  to  them  than  the  money  with  which  they  part.  What 
they  obtain  is  security,  and  whether  or  not  it  seems  best  to 
consider  such  security  as  a  consumption  good,  or  as  any  form 
of  wealth,  it  cannot  be  questioned  that  the  capital  and  labor 
engaged  in  creating  it  are  serving  mankind  in  the  same  way  as 
that  employed  in  the  creation  of  any  commodity  for  which 
consumers  are  willing  to  pay." 

LIST  OF  REFERENCES. 

Allan  H.  Willet,  "The  Economic  Theory  of  Risk  and  Insurance."  New 
York,  1 90 1. 

J.  A.  Hobson,  "  The  Industrial  System,"     London,  1909. 

Irving  Fisher,  "  The  Nature  of  Capital  and  Income."     New  York,  1906. 

Adam  Smith,  "  An  Inquiry  into  the  Nature  and  Causes  of  the  Wealth 
of  Nations."     Edinburgh,  1835. 

John  Stuart  Mill,  "  Principles  of  Political  Economy."     New  York,  1878. 

Robert  Ellis  Thompson,  "  Elements  of  Political  Economy."  Phila- 
delphia, 1875. 

William  Roscher,  "  Principles  of  Political  Economy."  Translated  by 
John  J.  Lalor.     New  York,  1878. 

Francis  A.  Walker,  "  Political  Economy."     New  York,  1888. 

Michael  Macmillan,  "  The  Promotion  of  General  Happiness."  Lon- 
don, 1890. 

Alfred  Marshall,  "  Principles  of  Economics."     Vol.  I.     New  York,  1898. 

Henry  Dunning  Macleod,  "The  History  of  Economics."     London,  1896. 

Arthur  Twining  Hadley,  "  Economics."     New  York,  1897. 

Frank  A.  Fetter,  "  The  Principles  of  Economics.'      New  York,  1904. 

8g 


INSURANCE   ECONOMICS 

Edwin  R.  A.  Seligman,  "  Principles  of  Economics."     New  York,  1905. 

Richard  T.  Ely,  "  Outlines  of  Economics."     New  York,  1905. 

Henry  Holt,  *'  On  the  Civic  Relations."     New  York,  1907. 

Frederick  A.  Cleveland,  "  Funds  and  Their  Uses."     New  York,  1904. 

C.  F.  Bastable,  "  Public  Finance."     London,  1903. 

Edward  T.  Devine,  "  Economics."     New  York,  1898. 

Cari  C.  Plehn,  "  Introduction  to  Public  Finance."     New  York,  1897. 

P.  Kropotkin,  *'  Mutual  Aid."     New  \ork,  1907. 

"  Fabian   Essays  in   Socialism,"  edited  by  G.   Bernard   Shaw,   Boston, 

1909. 
Irving  Fisher,  "  Introduction  to  Economic  Science."    New  York,  1910. 
Richard.  T.  Ely,  "Socialism  and  Social  Reform,"  New  York,  1894. 
John  Graham  Brooks,  "Social  Unrest,"  New  York,  1905. 
Henry  George,  Jr.,  "Menace  of  Privilege,"  New  York,  1905. 
Werner  Sombart,  "Socialism  and  the  Social  Movement,"  New  York,  1898. 
Edward  T.  Devine,  "Principles  of  Relief,"  New  York,  1904. 


90 


CHAPTER  III. 
INSURANCE  AS  AN  ELEMENT  OF  EARLY  COMMERCE. 

All  commerce,  ancient  or  modem,  is  more  or  less  in  the 
nature  of  a  speculation,  and,  quite  properly,  the  early  traders 
were  often  styled  "merchant  adventurers,"  because  of  the  sub- 
stantial risk  necessarily  inherent  in  all  commercial  undertak- 
ings on  a  large  scale.  The  most  successful  merchants  and 
traders  are  invariably  men  of  remarkable  judgment  and  fore- 
sight, gifted  with  exceptional  ability  to  determine  in  advance, 
with  accuracy  and  precision,  the  probable  chances  of  commer- 
cial gain.  In  proportion  as  the  sphere  of  commercial  enterprise 
expanded,  the  risk  of  uncertainty  necessarily  increased,  and 
in  no  field  as  much  as  in  that  of  maritime  commerce  and  world- 
wide navigation.  The  perils  of  the  sea,  much  more  so  in  the 
ancient  past  than  at  the  present  time,  early  suggested  and 
later  made  imperative,  an  equalization  of  losses  among  shippers 
and  merchants  by  a  combination  of  interests,  equivalent  to  a 
reduction  of  the  risk.  The  earliest  maritime  codes  extant 
contain  definite  rules  of  contributionship  as  an  established 
principle  of  mercantile  law  governing  the  sea  trade  of  the 
period.  The  practice  of  jettison,  or  the  "throwing  overboard  of 
part  of  the  cargo,  or  anything  on  board  the  vessel,  or  the  cutting 
or  casting  away  of  masts,  spars,  rigging,  sails,  or  other  furni- 
ture, with  the  object  of  lightening  or  relieving  the  vessel  in 
case  of  emergency  or  necessity,"  is  clearly  defined  in  the  Rho- 
dian  Sea  Law,  which  dates  from  about  900  B.C. 

The  Principle  op  Contributionship  and  Average. 

The  principle  of  contributionship,  as  applied  to  marine 
insurance,  is  stated  by  Walford  to  be  "that  those  whose  goods 

91 


INSURANCE    AS    AN    ELEMENT   OP   EARLY   COMMERCE 

or  interest  in  risk  have  been  saved  or  benefited  by  the  damage, 
loss  or  sacrifice  of  others,  should  not  profit  at  the  expense  of 
others,"  and  that,  therefore,  "those  whose  goods  have  been 
sacrificed  or  damaged,  or  suffered  charges  for  the  common 
good,  advantage,  or  safety,  ought  to  be  indemnified,"  and 
that,  therefore,  "justice  requires  that  equaHty  should  take 
place  by  contributions  amongst  all  those  interested  and  who 
have  been  in  danger  of  losing  all,  and  where  some  have  saved 
what  was  in  risk  only  because  others  have  sacrificed  theirs."* 

But  the  principle  of  contributionship,  which,  by  its  nature, 
implies  the  joint  assumption  by  different  parties  of  unavoid- 
able risk  in  maritime  commerce,  is  not  the  only  conclusive 
evidence  of  the  origin  of  marine  insurance  practice  in  ancient 
maritime  laws  and  usages.  The  practice  of  bottomry  and 
respondentia  bonds,  or  the  lending  of  money  at  maritime  inter- 
est in  return  for  the  assumption  of  maritime  risk,  was  widely 
established  even  in  very  early  times  and  extended  references 
thereto  occur  in  the  Rhodian  Law,  the  Laws  of  Oleron  (1075- 
1270  A.  D.),  and  the  Laws  of  Wisby,  promulgated  in  1288  A.  D. 
The  last  named  laws  are  the  first  in  which  marine  insurance  is 
referred  to  as  an  established  commercial  practice  of  the  times 
and  by  a  broad  interpretation  of  the  terms  used  it  included 
life  insurance  in  a  primitive  form  in  the  assumption  of  risk  on 
the  life  and  safety  of  the  master  or  owner  against  the  perils 
of  the  sea,  including  piracy  and  capture  by  the  enemy. 

The  Sea  Laws  of  Oleron  and  Wisby  form  the  basis  of  the 
justly  famous  marine  ordinance  of  France,  enacted  in  1681, 
which,  in  the  words  of  Flanders,  embodies  "in  systematic  order 
the  subjects  of  navigation,  shipping,  insurance  and  bottomry." 
Marshall,  in  his  treatise  on  the  law  of  insurance,  the  first  Amer- 
ican edition  of  which  was  published  in  1808,  observes  that 
"The  law  of  insurance  is  considered  as  a  branch  of  marine 
law  and  was  borrowed  by  us  from  the  Lombards,  who  first 
introduced  the  use  of  this  contract  into  England.  It  is  also 
a  branch  of  the  law  of  merchant,  being  found  in  the  practice 

♦Ins.  Cyclopedia,  Vol  II,  p.  112. 

92 


INSURANCE   AS   AN   ELEMENT   OF   EARLY   COMMERCE 

of  merchants,  which  is  nearly  the  same  in  all  countries  where 
insurance  is  in  use;  and  indeed  merchants  themselves  were, 
for  a  long  time,  the  only  expounders  of  it.  The  law  of  mer- 
chants not  being  founded  in  the  institutions  or  local  customs 
of  any  particular  country,  but  consisting  of  certain  principles 
which  general  convenience  has  established,  to  regulate  the 
dealings  of  merchants  with  each  other  in  all  countries,  may 
be  considered  as  a  branch  of  it  all."  The  sources  of  the  law 
of  insurance,  in  the  words  of  Marshall,  are,  "first,  the  ordinances 
of  different  commercial  states ;  second,  the  treatises  of  learned 
authors  on  the  subject  of  insurance;  and  third,  the  judicial 
decisions  in  this  country  (England)  and  others  professing  to  fol- 
low the  general  marine  law  and  the  law  of  merchants.*  It  is  thus 
apparent  that  the  practice  and  the  law  of  insurance  have  been 
evolved  out  of  the  principles  and  practice  of  commerce  through 
centuries  of  human  experience  as  a  logical  necessity  or  aid 
to  the  development  or  furtherance  of  commercial  enterprise 
throughout  the  world. 

Importance  op  Early  Law  and  Custom. 

A  somewhat  extended  consideration  of  the  early  laws  and 
usages,  with  particular  reference  to  maritime  commerce  and 
legislation,  is  indispensable  for  a  sound  understanding  of  the 
basic  principles  which  govern  the  use  of  insurance  practice  in 
modem  life.  In  the  course  of  the  many  intervening  years, 
with  the  growth  of  commerce  and  the  differentiation  of  human 
effort,  many  new  and  novel  forms  of  insurance  have  come  into 
existence,  some  of  which  touch  but  remotely  commercial  under- 
takings considered  in  the  strictest  sense  of  that  term.  But 
insurance  in  every  form,  or  by  every  method,  is  based  upon 
contractual  considerations  and  implies  the  assumption  of  risk 
in  return  for  a  definite  payment  of  money  at  stated  intervals. 
The  considerations  which  govern  the  insurance  contract  are, 
therefore,  strictly  commercial  and  the  whole  business  of  insur- 
ance is  carried  on  as  a  species  of  commerce,  mostly  through 

♦Marshall  on  Insurance,  2d  American  ed.,  pp.  18,  19. 

93 


INSURANCE   AS   AN   ELEMENT   OF   EARLY   COMMERCE 

corporations  organized  and  conducted  in  identically  the  same 
manner  as  commercial  undertakings  generally.  Insurance  in 
any  one  of  its  many  and  varied  forms  is  sold  the  same  as  other 
merchandise,  it  has  its  price,  which  is  governed  by  its  cost  and 
competition,  and,  as  occasion  may  arise,  by  supply  and  demand, 
particularly  in  the  case  of  war  or  impending  maritime  disaster. 
The  rate  in  marine  insurance  is  governed  by  the  risks  inherent 
in  maritime  commerce  and  inland  navigation,  which  vary 
widely  in  their  nature,  according  to  distance,  locality,  and  time. 
For  all  practical  purposes,  the  principles  which  govern  the 
assumption  of  commercial  or  individual  risks  at  the  present 
time  are  exactly  the  same  as  those  which  governed  in  ancient 
law  and  custom,  and  however  remote  the  analogy  may  seem, 
it  is  nevertheless  a  true  and  connected  chain  of  historic  evidence 
which  binds  together  the  distant  commercial  period  with  the 
present,  however  unlike  the  conditions  at  the  two  extremes 
may  appear  when  contrasted  in  the  light  of  the  marvelous 
changes  which  have  taken  place. 

Bottomry  Laws  and  Usury  Loans. 

Bottomry  loans  are  the  earliest  form  of  maritime  contracts 
in  which  are  combined  the  elements  of  risk  assumption  in  return 
for  a  special  consideration.  The  risk  assumed  in  bottomry  loans 
is  that  the  money  lent  is  not  to  be  returned  if  the  vessel  is  lost, 
while  the  special  consideration  is  maritime  interest,  or  a  rate  in 
excess  of  the  legal  rate,  but  not  in  conflict  with  the  usury  laws. 
The  leading  case  in  which  legal  sanction  was  given  to  this  prac- 
tice in  English  courts  of  law  was  decided  by  Lord  Chief  Baron 
Hall,  who  held  that  "this  (bottomry)  bond  is  not  within  the 
statute  (of  usury),  for  this  is  the  common  way  of  assurance 
and  if  this  were  void  by  the  statute  of  usury,  trade  would  be 
destroyed."* 

The  commercial  nature  of  this  form  of  contract  in  navi- 
gation is  so  self-evident  that  it  requires  no  legal  decisions  to 
define  its   position  in   the  practice  of   insurance.     As  quoted 

♦The  Law  of  Usury,  by  J.  W.  Blydenburgh,  New  York,  1844. 

94 


INSURANCE   AS   AN   ELEMENT    OP   EARLY   COMMERCE 

by  Hall,  who  was  the  first  American  commentator  on  mari- 
time loans  (Baltimore,  1811),  "There  is  a  great  resemblance 
between  contracts  of  maritime  loans  and  insurance.  They 
frequently  appear  to  be  governed  by  the  same  rules.  They 
are  twin  brothers  to  whom  maritime  commerce  has  given, 
birth';  for  each  has  a  character  peculiar  to  itself."  And  he 
continues,  **It  is  beyond  doubt  that  this  contract,  without 
which  commerce  would  languish  extremely,  is  lawful.  The 
interest  which  the  lender  claims  in  case  of  a  successful  voyage 
is  the  price  of  hazard,  and  has  nothing  in  it  which  resembles 
usury."  Walford  refers  to  bottomry  loans  as  **  very  ancient — 
apparently  coeval  with  the  earliest  development  of  maritime 
commerce,"  ''that  they  were  apparently  devised  with  the  view 
of  defeating  various  restrictions  to  usury ; — or,  if  not  especially  so 
devised,  were  very  soon  specially  adapted  to  that  end;  and  that, 
they  being  in  themselves  a  species  of  marine  insurance,  are 
supposed  to  have  led  directly  up  to  the  present  system  of  marine 
insurance."  The  reference  to  bottomry  loans  in  the  Rhodian 
Law  is  stated  by  Walford  to  be,  **  If  masters  or  merchants 
borrow  money  for  their  voyages,  the  goods,  freights,  ship  and 
money  being  free,  they  shall  not  make  use  of  suretyship  except 
there  be  some  apparent  danger  of  the  sea  or  of  pirates.  And 
for  the  money  so  loaned  the  borrowers  shall  pay  naval  interest." 

The  Rhodian  Sea  Law. 

Six  chapters  of  the  Sea  Law  deal  with  loans  of  this  char- 
acter, but  it  is  conceded  that  the  references  in  the  original 
text  were  very  obscure.  Mr.  Ashbumer,  the  most  learned 
commentator  on  the  Rhodian  Law,  explains  that  although 
the  terms  in  which  loans  of  this  kind  are  expressed  differ,  they 
remained  substantially  the  same  from  the  age  of  Demosthenes 
to  the  13th  Century,  and  that  while  there  are  differences  in  the 
wording  of  the  documents,  they  do  not  necessarily  imply  cor- 
responding differences  in  the  legal  effect  of  the  transactions. 
Maritime  loans  under  the  Rhodian  Law,  according  to  this 
writer,  "resemble  ordinary  loans  upon  a  contingency,  but  there 

95 


INSURANCE   AS   AN   ELEMENT   OP   EARLY   COMMERCE 

is  evidence  that  both  in  antiquity  and  the  Middle  Ages  the 
forms  of  the  maritime  loans  were  made  use  of  for  contracts 
which  were  purely  aleatory,"  or,  in  other  words,  in  the  nature 
of  gambling  ventures.  The  important  distinction  to  be  observed 
in  this  brief  discussion  is  that  bottomry  loans  were  a  species 
of  contract  based  upon  risk  assumption,  and  while  their  language 
varies  and  their  purpose  and  nature,  according  to  the  time  and 
circumstances,  the  underlying  object,  or  purpose,  was  in  all 
cases  the  same  and  strictly  in  the  nature  of  marine  in- 
surance. As  pointed  out  by  Mr.  Ashburner,  the  actual  com- 
mercial facts  do  not  always  correspond  exactly  to  the  language 
of  the  documents,  for  conveyors  get  into  the  habit  of  using 
certain  forms  the  legal  effect  of  which  has  been  precisely  fixed 
by  decisions  or  by  usage.  Hence,  although  the  commercial 
facts  differ  from  those  which  the  phrase  was  originally  framed 
to  express,  the  conveyor  goes  on  using  it,  although  there  may 
be  an  important  change  in  commercial  conditions,  even  though 
there  is  no  change  in  the  language  of  the  documents.  Par- 
ticularly is  this  the  case  where  circumstances  make  it  necessary 
to  adopt  expediencies  such  as  were  imperative  when  the  Church 
held  that  maritime  risk  did  not  justify  the  taking  of  interest. 

Historical  Value  of  Commercial  Documents. 

To  the  foregoing  must  be  added  the  further  explanation, 
also  set  forth  by  Ashburner,  that  few  commercial  documents 
have  been  preserved  in  the  original,  since  business  men  only 
preserve  documents  which  enable  them  to  enforce  or  resist 
a  claim.  Documents,  however,  which  have  value  only  for  a 
definite  period  of  time  are  usually  destroyed  when  the  limit 
of  their  practical  usefulness,  or  value,  has  passed.  This  is  as 
true  of  policies  of  insurance  as  of  charter-parties,  bills  of  lading, 
etc.  But  there  is  sufficient  evidence  in  ancient  maritime  loans 
to  sustain  the  conclusion  that  practically  co-incident  with  the 
beginnings  of  an  extensive  commerce  by  sea,  bottomry  loans  came 
into  existence  and  that  out  of  these,  in  course  of  time,  developed 
the  modem  practice  of  marine  insurance,  which  again  gave  rise 

9fi 


INSURANCE    AS    AN    ELEMENT    OF   EARLY    COMMERCE 

to  all  the  other  forms  of  insurance  which  have  been  developed 
and  perfected  at  later  periods. 

Historical  Continuity  op  the  Doctrine  of  Average. 
The  basic  doctrine  in  marine  insurance  is  general  average, 
of  which,  according  to  Duckworth,  the  best  and  most  generally 
accepted  definition  is  "All  loss  which  arises  in  consequence  of 
extraordinary  sacrifice  made,  or  expense  incurred,  for  the 
preservation  of  the  ship  and  cargo,  comes  within  general  average 
and  must  be  borne  proportionately  by  all  who  are  interested." 
This  doctrine  of  general  average,  according  to  the  same  authority, 
is  admittedly  "founded  upon  the  Rhodian  Law  and  general 
average  loss  is  calculated  according  to  the  laws  in  force  at  the 
port  of  discharge."  The  Rhodian  Law  of  general  average  was  in 
its  entirety  incorporated  in  the  Roman  Civil  Law  and  as  such 
it  became  in  time  incorporated  in  the  practice  of  the  Admiralty 
Courts  of  Europe  and  America.  According  to  Walford,  the 
connecting  link,  so  far  as  England  is  concerned,  is  directly 
obtained  in  the  fact  that  William  the  Conqueror  made,  and 
Henry  I  ratified,  the  law  concerning  goods  cast  overboard  by 
mariners  in  a  storm,  founded  upon,  or,  as  Molloy  says,  in 
imitation  of,  the  ancient  Rhodian  Law.*  Since  it  is  not  the 
present  purpose  to  consider  in  detail  the  origins  of  insurance 
in  all  its  branches,  but  merely  the  historic  relation  of  insur- 
ance to  ancient  and  modem  commerce,  it  is  not  necessary 
to  enlarge  upon  the  qualifications  of  the  term  "average,"  nor 
even  its  main  divisions  into  general  and  particular,  which  are, 
however,  essential  for  a  full  understanding  of  the  first  prin- 
ciples of  marine  insurance.  The  doctrine  of  average,  however, 
applies,  in  many  countries,  at  least,  also  to  fire  insurance,  the 
clause  being  most  commonly  introduced  into  mercantile  poli- 
cies and  agricultural  (hail,  wind  storm,  etc.),  insurance.  Here, 
again,  the  limitations  of  the  present  inquiry  preclude  a  more 
extended  consideration  of  the  details  of  a  subject  which  itself  is 
one  of  unusual  interest  and  great  practical  importance. 

♦Ins,  Cyclo.,  Vol.  I,  p.  225. 

97 


insurance  as  an  element  of  early  commerce 

Early  Ordinances  Regulating  Insurance  Practices. 

At  the  commencement  of  the  15th  Century  the  practice 
of  insurance  had  become  quite  general  with  European  com- 
mercial nations.  As  early  as  1435  ordinances  regulating  the 
insurance  business  had  been  adopted  at  Barcelona  which  re- 
quired that  underwriting  should  be  done  in  the  presence  of  a 
notary  and  policies  not  thus  authenticated  were  to  be  considered 
null  and  void.  As  early  as  1468,  by  a  decree  of  the  Grand 
Council  of  Venice,  insurance  cases  were  required  to  be  tried 
before  the  Consular  Mercantile  Court,  and  by  1523  a  complete 
code  of  insurance  laws  had  been  enacted  at  Florence.* 

From  Italy,  no  doubt,  the  practice  of  insurance  was  in- 
troduced into  England  through  the  Lombards, f  for  the  earliest 
policies  in  existence,  both  marine  and  fire,  contained  the  pro- 
vision that  "This  writing  or  policy  of  assurance  shall  be  of  as 
much  force  and  effect  as  any  writing  heretofore  made  in  Lombard 
Street."  The  significance  of  this  provision  is  emphasized  by  the 
fact  that  during  Colonial  times  policies  issued  in  America, 
certainly  as  early  as  1746,  (which  is  the  date  of  the  oldest 
American  insurance  policy  in  existence  {)  contained  the  identical 
phraseology  just  referred  to. 

In  1556  Henry  III.,  King  of  France,  issued  an  edict  con- 
cerning the  Court  and  authority  of  the  Prior  in  Councils  of 
Roan,  including  the  provision  that,  "As  we  are  informed  that 
the  trade  of  assurances  is  of  late  greatly  advanced  by  merchants 
of  the  said  city  of  Roan  (a  work  so  honorable  that  it  does  yet 
beautify  and  greatly  advance  the  trade  and  commerce  of  the 

^*  For  a  convenient  summary  account  of  the  early  history  of  insur- 
ance, see  John  Beckmann's  "History  of  Inventions,  Discoveries  and 
Origins,"  4th  English  Ed.,  London,  1846,  Vol.  I,  article  on  Insurance. 

t  Park,  System  of  Marine  Insurance,  7th  Ed.,  London,  181 7,  Vol.  I, 
p.  xxxviii. 

X  An  account  of  Early  Insurance  Offices  in  Massachusetts  from  1724- 
180 1,  by  E.  R.  Hardy,  Librarian,  Insurance  Library,  Boston,  1901. 
For  an  account  of  the  early  insurance  practices  in  America,  see  the 
History  of  the  Insurance  Company  of  North  America,  Phila.  1885, 
p.  14,  et  seq. 

98 


INSURANCE   AS   AN    ELEMENT   OP   EARLY   COMMERCE 

said  city)."  It  was,  therefore,  enacted  that  the  merchants 
should  choose  one  among  them,  "such  an  one  as  they  should 
think  meet,  being  a  man  trusty  and  expert  in  the  knowledge 
of  the  trade  of  assurances,''  who  should  make  and  register  the 
said  policies  of  insurance.  This,  no  doubt,  was  for  the  purpose 
of  bringing  about  uniformity  in  insurance  transactions,  for  it 
was  further  ordained  that  all  judges  and  others  concerned 
should  thereafter  give  full  credit  to  the  transactions  thus  made 
a  matter  of  record,  and  not  "meddle  in  the  said  business  of 
assurances  or  anything  thereunto  belonging." 

The  Ancient  Law  Merchant. 

It  is  made  evident  by  these  references  that  insurance  at 
this  very  early  period  was  clearly  recognized  as  an  important 
element  and  instrumentality  of  commerce.  Insurance  laws 
and  usages  had,  in  fact,  become  as  much  a  part  of  the  Law 
Merchant  as  bills  of  exchange  and  other  mercantile  instrumen- 
talities invented  or  designed  for  the  purpose  of  extending  and 
facilitating  commercial  relations.  Vance,*  in  the  historical  in- 
troduction to  his  treatise  on  Insurance  Law,  refers  to  this 
period,  as  follows:  "It  is  thus  seen  that  during  the  fourteenth 
and  fifteenth  centuries  the  practice  among  merchants  of  making 
insurance  contracts  had  become  general  throughout  all  the 
maritime  states  of  Europe.  The  contracts  seem  to  have  been 
confined  to  those  merchants  engaged  in  the  more  extensive 
international  commerce,  and  this  fact  rendered  necessary  uni- 
formity in  the  regulation  of  insurance  as  practiced  in  these 
different  countries.  Thus  there  was  impressed  upon  these 
insurance  regulations,  just  as  well  as  upon  other  commercial 
rules  growing  out  of  the  custom  of  merchants,  a  certain  inter- 
national character,  and  the  whole  body  of  rules  intended  to 
govern  these  commercial  transactions  became  known  as  the 
*Law  Merchant.'  These  rules  bore  a  peculiar  relation  to  the 
respective  systems  of  law  existing  in  the  several  countries  in 

♦Handbook  of  the  Law  of   Insurance,  by  Wm.  R.  Vance,  St.  Paul, 
Minn.,  1904,  p.  4,  et  seq. 

99 


INSURANCE   AS   AN    ELEMENT   OF   EARLY   COMMERCE 

which  the  Law  Merchant,  by  virtue  of  the  customs  of  mer- 
chants, prevailed." 

The  Beginning  of  Insurance  Regulation  in  England. 

By  1600  marine  insurance  had  become  firmly  established 
in  England,  and  in  the  year  following,  by  the  43rd  Elizabeth, 
a  Court  of  Insurances  was  established  in  London,  for  the  pur- 
pose of  affording  facilities  for  settling  disputes  arising  under 
insurance  policies.  The  Court  included  among  its  members 
eight  merchants  with  full  power  and  authority  to  see,  examine, 
order  and  decree,  all  and  every  case,  or  cases,  concerning 
policies  of  assurances  in  a  brief  and  summary  course,  as 
seemed  best  according  to  their  discretion  and  without  formali- 
ties, or  pleadings,  or  proceedings.*  With  the  statute  of  1601 
begins  in  English  law  the  Parliamentary  regulation  of  insurance, 
governing  chiefly  as  to  the  construction  of  the  contract  in 
courts  of  law  and  the  manner  of  its  making  and  enforcement. 
A  similar  regulation  of  insurance  was  introduced  into  Rotterdam 
in  1604  and  into  the  French  Code,  known  as  the  Guidon  sur 
la  Mer,  in  1607.  A  Chamber  of  Insurance  was  also  established 
at  Amsterdam  in  161 2 1  and  ten  years  later  Malynes  published 
his  famous  treatise  Lex  Mercatoria,  or  the  Ancient  Law  Mer- 
chant, a  third  edition  of  which  was  published  in  i686.{ 

Insurance  as  a  Branch  of  the  Law  Merchant. 

Malynes  considered  the  whole  subject  of  insurance  in  all  its 
branches  and  among  other  rules  he  enumerated  twelve  cardinal 
principles  of  knowledge  as  the  foundation  of  complete  mercan- 

*  Regarding  the  history  of  this  unique  court  very  little  is  known 
with  accuracy.  The  most  complete  account  is  in  Walford's  Ins.  Cyclo., 
article  Ch:  mbers  of  Insurance,  Vol.  I,  p.  486,  et  seq.  See  also,  Park, 
System  of  Marine  Ins.,  Vol.  I,  p.  xi.  Also,  Wambaugh,  Cases  on  Insur- 
ance, which  gives  in  full  the  act  establishing  the  Court  of  the  Com- 
missioners, 43rd  Elizabeth,  c.  12  (1601). 

t  Walford,  Ins.  Cyclo.,  Vol.  I,  p.  485. 

X  Malynes  (Gerard)  Consuetude  vel  Lex  Mercatoria,  or  the  Ancient 
Law  Merchant,  London,  1622,  (Copy  in  Ins.  Library,  Boston,  Mass.). 

100 


INSURANCE   AS   AN   ELEMENT   OP   EARLY   COMMERCE 

tile  instruction,  of  which  two  relate  to  insurances,  as  follows: 
**  ist,  Delivery  of  monies  at  interest  or  upon  bottomry,  or  upon 
lives,  annuities,  or  pensions,  etc.,"  and  2nd,  **The  manner  of 
making  assurances  upon  goods,  ships,  the  persons  of  men,  or 
any  other  things  adventured  by  sea  or  by  land;  or  the  customs 
observed  between  different  nation  or  nations."  In  addition, 
however,  numerous  references  to  insurance  occur  throughout 
the  work  and  various  appendices  which  supplement  the  third 
edition,  published  in  1686.  He  refers  to  the  "most  laudable 
custom  of  assurances,"  to  the  end  that  merchants  might  enlarge 
and  augment  their  traffic  and  commerce  and  not  adventure  all 
in  one  bottom  to  their  loss  and  overthrow,  but  that  the  same 
might  be  answered  for  by  many."  He  traces  the  origin  of 
this  custom  to  the  ancient  Sea  Laws  and  merchant  codes  of 
maritime  nations.  The  importance  of  this  reference  to  the 
ancient  Law  of  Merchants  by  Malynes  consists  in  the  fact  that 
all  insurances  are  recognized  as  mercantile  transactions  and  as 
an  aid  and  encouragement  to  commerce,  including  insurances 
on  lives.  To  once  more  quote  his  language,  perhaps  rather 
quaint,  but  well  adapted  to  the  needs  of  the  period,  "For  by 
the  custom  of  insurances  it  is  intended  to  avoid  cavillations ; 
every  insurer  should  be  bound  ipso  facto  to  the  said  assurance, 
having  a  respect  to  the  augmentation  of  traffic  and  commerce.'' 

Admiralty  Jurisdiction  Over  Insurance. 

The  third  edition  of  Lex  Mercatoria,  published  in  1686, 
has  as  an  appendix  a  treatise  on  the  jurisdiction  of  the  admiralty 
of  England  by  Richard  Zouch.  Numerous  references  to  insur- 
ance occur  therein  and  among  others  the  important  statement 
that  the  admiralty  of  England  had  the  most  ample  power  and 
jurisdiction  over  business  relating  to  the  sea,  "to  hold  conusance 
of  pleas,  debts,  bills  of  exchange,  policies  of  assurance,  charter 
parties,  bills  of  lading,  etc."  These  and  other  references  to 
insurance  prove  conclusively  that  in  the  opinion  of  these  early 
writers  and,  in  fact,  in  daily  life  and  by  commercial  custom 
and  usage,  insurance  even  three  hundred  years  ago  was  con- 

zoi 


INSURAMCE   AS   AN   ELEMENT   OF   EARLY   COMMERCE 

sidered  an  important  element  of  the  commerce  of  the  period. 
"While  not  ignoring  the  fact  that  most  of  the  insurance  contracts 
made  by  merchants  at  this  time  were  of  marine  insurance,  and 
probably  to  a  not  inconsiderable  extent  loans  upon  bottomry  and 
respondentia,  still  the  general  character  of  the  business  upon  the 
basis  of  the  earlier  definitions  would  seem  to  conclusively  establish 
that  insurance  transactions  as  a  whole  were  included  in  the  Law 
Merchant  as  ordinary  mercantile  transactions  and  considered  an 
indispensable  element  of  everyday  commercial  life. 

French  Ordinances  on  Commerce  and  Marine  Insurance. 
In  1673  an  ordinance  of  commerce  was  enacted  in  France 
under  the  auspices  of  Colbert,  as  Minister  of  Finance  to  Louis 
XIV  and  this  enactment  in  1681  was  followed  by  a  correspond- 
ing ordinance  of  marine,  which  is  justly  considered  the  most 
complete  code  of  maritime  and  commercial  law  that  was  ever 
attempted  to  be  framed  and  which,  considering  the  originality 
and  extent  of  the  design,  in  the  opinion  of  Duer*  and  other 
writers  on  insurance,  deserves  to  be  ranked  among  the  noblest 
works  that  legislative  genius  and  learning  have  ever  accom- 
plished. The  great  importance  to  insurance ,  interests,  of  this 
ordinance,  or  code,  lies  in  the  elaborate  consideration  which 
is  given  to  insurance  practices  and  the  regulation  of  the  busi- 
ness by  government.  As  pointed  out  by  Duer,  "Perhaps  the 
most  valuable  portion  of  this  ordinance  is  that  which  relates 
to  insurance,  and  of  this  no  more  striking  proof  can  be  given 
than  the  results  from  the  fact  that  the  framers  of  the  present 
commercial  code  of  France  have  adopted  these  chapters  of  the 
ordinance,  not  merely  as  a  basis,  but  as  the  substance  of  their 
own  labors  on  the  same  subject,  so  that  the  provisions  (relating 
to  insurance)  in  the  two  codes  are  nearly  identical. "f 

*  Duer,  John,  The  Law  and  Practice  of  Marine  Insurance,  deduced 
from  a  critical  examination  of  the  adjudged  cases  and  the  general  usage 
of  commercial  nations,  Vol.,  i,  p.  43,  N.  Y.,  1845. 

t  For  a  full  account  of  the  Ordinance  of  1681  see  Walford's  Ins.  Cyclo.* 
Vol.  IV,  p.  310;  also  Park,  System  of  Marine  Insurance,  7th  ed,.  Vol.  I, 
p.  xxxiii,  et  seq. 


insurance  as  an  element  of  early  commerce 

On  Contracts  Depending  on  Chance. 

Beginning  with  the  i8th  Century,  the  first  important 
work  giving  a  brief  consideration  to  insurance  in  its  relation 
to  commerce,  is  the  classic  treatise  on  the  Law  of  Nature  and 
Nations  by  Puffendorf,  Counsellor  of  State  at  one  time  to  the 
King  of  Sweden  and  at  another  time  to  the  King  of  Prussia. 
The  first  edition  was  printed  in  1 7 1 2 ,  and  the  third  in  1 7 1 7 .  *  The 
work  includes  a  chapter  on  "  Contracts  Depending  on  Chance," 
the  eighth  section  of  which  treats  of  insurance.  There  occurs 
therein  the  following  significant  passage:  "To  these  contracts, 
that  of  insuring  bears  some  affinity;  when  for  a  certain  sum  a 
man  takes  upon  him  the  risk  that  goods  are  to  run  in  transpor- 
tation from  place  to  place,  usually  by  sea;  which,  if  they  happen 
to  be  lost,  the  insurer  is  bound  to  make  good."  The  passage 
emphasizes  the  view  that  insurance  not  only  was  considered 
by  this  eminent  author  an  element  of  commerce,  but  an  element 
of  commerce  in  course  of  transportation,  while  the  fact  that 
works  of  this  character  were  translated  into  English,  no  doubt, 
explains,  in  part  at  least,  the  similarity  between  English  and 
Continental  customs  and  the  incorporation  into  English  law 
and  usage  of  legal  provisions  which  can  be  traced  back  to  the 
commercial  codes  and  sea  laws  of  many  other  and  more  ancient 
nations. 

First  Discussion  of  Insurance  in  American  Literature. 

A  few  years  later  [1725]  there  was  published  in  Phila- 
delphia a  tract  of  great  historical  value,  by  Francis  Rawle, 
author,  and  Benjamin  Franklin,  printer,  with  the  curious  title 
"Ways  and  Means  for  the  Inhabitants  of  Delaware  to  Become 
Rich."  The  tract  is  referred  to  in  the  History  of  the  Insur- 
ance Company  of  North  America,  f  according  to  which  the  author 

*  Of  the  Law  of  Nature  and  Nations,  written  in  Latin  by  Baron  Puffen- 
dorf and  translated  into  English  by  Basil  Kennet,  D.  D.,  3rd  Ed.,  Lon- 
don, 17 1 7,  Chap.  IX  on  Contracts  depending  on  Chance. 

t  History  of  the  Insurance  Company  of  North  America,  Phila.,  1885, 
p.  15- 

IQ3 


INSURANCE   AS   AN   ELEMENT   OF   EARLY   COMMERCE 

"classes  insurance  as  a  branch  of  trade,  which,  while  helpful 
to  the  adventurer  on  risks  by  sea,  would  as  well  be  promotive 
of  commerce  and  agriculture."  The  author  held  the  view  that, 
"Having  thus  far  discoursed  of  most  of  the  branches  of  trade 
we  are  capable  of,  there  is  yet  one  great  encouragement,  to 
adventure  in  the  discovery  and  prosecution  of  new  markets; 
more  safe  to  the  industrious  adventurer;  namely  an  insurance 
office  in  one  or  more  of  these  colonies;  which  is  the  interesting 
of  divers  in  the  loss  or  profit  of  a  voyage,  and  is  now  become 
so  much  the  practice  of  England,  that  insurance  may  be  had 
in  divers  cases  as  well  against  the  hazards  at  land,  as  cas- 
ualities  at  sea,  which  must  be  acknowledged  not  only  to  be 

safe,  but  a  great  encouragement  to  adventure This  will 

be  good  and  safe  and  cannot  be  easily  overset  by  a  few  losses ; 
and  we  conceive  will  contribute  to  keep  up  the  value  of  our 
paper  credit  by  promoting  of  trade,  navigation  and  building 
of  ships,  and  in  consequence  of  great  advantage  to  this  river: 
which  we  confer  to  the  consideration  of  the  merchant." 

Early  Insurance  Advertisements. 

This  is  probably  the  first  reference  to  insurance  practice 
in  American  literature,  but  mention  may  be  made  in  this  con- 
nection of  the  fact  that  the  first  advertisement  of  the  opening 
of  an  insurance  office  in  this  country,  that  is,  in  Philadelphia  in 
1 72 1,  was  in  the  American  Weekly  Mercury,  of  May  25th  of 
that  year,  which  commences  with  the  significant  statement  that 
"Assurances  from  losses  happening  at  sea,  etc.,  being  found  to 
be  very  much  for  the  ease  and  benefit  of  the  merchants  and 
traders  in  general ;  and  whereas  the  merchants  of  this  city  of 
Philadelphia  and  other  parts  have  been  obliged  to  send  to 
London  for  such  assurance,  which  has  not  only  been  tedious 
and  troublesome,  but  even  very  precarious,"  it  is  proposed, 
etc.,  etc.* 


*  History  of  the  Insurance  Company  of  North  America,  Phila.,  1885, 
P-  15- 

104 


insurance  as  an  element  of  early  commerce 

Encouragement  of  Trade  by  Insurance. 

In  1745,  John  Gary,  a  merchant  of  Bristol,  England, 
published  an  extremely  interesting  tract*  with  the  title  **  A 
Discourse  on  Trade,"  which  contains  an  important  and  ex- 
tended reference  to  insurance.  Since  this  tract  is  almost  un- 
known, the  reference  to  insurance  is  quoted  in  full,  to  explain 
the  views  of  the  author  on  the  necessity  of  Parliamentary 
interference  with  insurance  practice,  to  bring  about  much 
needed  reforms.  After  discussing  trade  in  general  and  the  best 
possible  means  of  bringing  about  a  revival  of  a  declining  com- 
merce with  other  countries,  Gary  observed  with  reference  to 
insurance,  that: 

"  I  cannot  close  this  discourse  without  speaking  something 
of  insurance.  The  first  design  whereof,  was  to  encourage  the 
merchants  to  export  more  of  our  product  and  manufactures, 
when  they  knew  how  to  ease  themselves  in  their  adventures, 
and  to  bear  only  such  a  proportion  thereof  as  they  were  willing 
and  able  to  do;  but  by  the  irregular  practices  of  some  men, 
this  first  intention  is  wholly  obviated;  who  without  any  interest, 
have  put  in  early  policies,  and  gotten  large  subscriptions  on  ships, 
only  to  make  advantage  by  selling  them  to  others ;  and  there- 
fore have  industriously  promoted  false  reports,  and  spread 
rtmiours,  to  the  prejudice  of  the  ships  and  masters,  filling  men's 
minds  with  doubts,  whereby  the  fair  trading. merchant,  when 
he  comes  to  insure  his  interest,  either  can  get  no  one  to  under- 
write, or  at  such  high  rates,  that  he  finds  it  better  to  buy  the 
other  policies  at  advance;  by  this  means  these  stock-jobbers 
of  insurance,  have,  as  it  were,  turned  it  into  a  wager,  to  the 
great  prejudice  of  trade:  likewise  many  ill-designing  men,  their 
policies  being  over-valued,  have  (to  the  abhorence  of  honest 
traders,  and  to  the  scandal  of  trade  itself)  contrived  the  loss 
of  their  own  ships.  On  the  other  side,  the  underwriters,  when 
a  loss  is  ever  so  fairly  proved,  boggle  in  their  payments,  and  force 
the  insured  to  be  content  with  less  than  their  agreements,  for 
fear  of  engaging  themselves  in  long  and  chargeable  smts. 

"  Now  if  the  parliament  would  please  to  take  these  things 
into  their  consideration,  they  may  reduce  insurance   to  its  first 

*A  Discourse  on  Trade,  by  John  Gary,  a  Merchant  of  Bristol,  Lon- 
don, 1745,  p.  93;  see  also  Dictionary  of  Commerce,  by  Postlethwayt, 
and  Ed.,  pub.  London,  1751,  p.   142. 

IQ5 


INSURANCE   AS   AN    ELEMENT    OF   EARLY   COMMERCE 

intention,  by  obliging  the  insured  to  bear  such  a  proportionable 
part  of  his  adventure,  (the  premio  included)  as  to  them  shall 
seem  fit,  and  also  the  insurers,  when  a  loss  is  fully  made  out, 
to  pay  their  subscriptions  without  abatement,  which  will  pre- 
vent both;  and  if  any  differences  should  arise,  to  direct  easy 
ways  for  adjusting  them,  without  attending  long  issues  at  law, 
or  being  bound  up  to  such  nice  rules  in  their  proofs,  as  the  affairs 
of  foreign  trade  will  not  admit. 

"  I  know,  that  by  a  clause  in  a  statute  made  prima  Annae 
the  wilful  casting  away,  burning,  or  otherwise  destroying  a  ship, 
by  any  captain,  master,  mariner,  or  other  officer  belonging  to  it, 
is  made  felony,  without  benefit  of  clergy;  but  that  statute  is 
so  qualified,  that  it  is  difficult  to  convict  the  offender,  because 
the  fact  must  be  done,  to  the  prejudice  of  the  owner,  or  owners, 
or  of  any  merchant  or  merchants  that  shall  load  goods  thereon, 
else  he  doth  not  come  within  its  penalty,  so  it  doth  not  reach 
the  evil  I  here  mention,  viz.,  the  abominable  contrivance  of  the 
owners  to  have  their  own  ships  destroyed,  in  order  to  make  an 
advantage  by  their  insurances;  a  crime  so  black  in  itself,  that 
it  cannot  be  mentioned  without  horror.  These  men,  when  they 
frame  their  dark  designs,  will  take  care,  for  the  security  of  those 
they  employ,  that  none  besides  themselves  shall  load  goods 
on  the  ships  they  intend  shall  be  thus  destroyed,  and  it  cannot 
be  supposed  that  they  receive  prejudice  thereby  themselves, 
so  the  prosecution  on  that  statute  is  evaded;, but  if  the  insured 
were  bound  to  make  out  their  interests,  and  to  bear  a  pro- 
portionable part  of  the  loss  themselves,  this  would,  as  it  were 
naturally  prevent  such  scandalous  practices." 

The  Beginning  of  Insurance  Science. 
In  1747  there  was  published  in  London  a  very  suggestive 
essay  on  the  Science  of  Insurance,  by  Corbyn  Morris.*  The  work 
is  practically  limited  to  a  consideration  of  marine  insurance,  but 
with  important  bearings  upon  the  place  of  insurance  in  com- 
mercial relations.  Insurance  is  referred  to  as,  "that  aid  whereby 
the  national  commerce  is  supported."  The  work  of  this  author 
confirms  the  view  that  insurance  at  this  early  period  was  not 
only  considered  an  important  element  of  commerce,  but  was  in 

*  An  essay  towards  illustrating  the  Science  of  Insurance  by  the  author 
of  "A  Letter  of  a  Bystander,"  (Corbyn  Moms),  London,  1747. 

106 


INSURANCE   AS   AN    ELEMENT   OF   EARLY   COMMERCE 

fact  a  distinct  means  or  method  whereby  a  considerable  pro- 
portion of  such  commerce  was  made  possible  and  advisable.  In 
the  words  of  the  author,  "  Insurances  give  tranquillity  and 
cheerfulness  to  the  extensive  trader;  these  only  make  it  justi- 
fiable for  him  to  venture  in  many  branches  of  commerce,  which 
are  of  great  benefit  to  the  nation;  these  enable  him  to  lay  a 
steady  foundation  of  credit;  to  procure  money  upon  easy  terms, 
and  to  bring  his  goods  cheap  to  foreign  markets."*  The  tract 
contains  many  other  and  decidedly  suggestive  references  to 
practices  of  insurance  as  an  aid  to  commerce  and  the  further- 
ance of  commercial  enterprise,  at  a  period  of  time  when  such 
enterprise  was  particularly  exposed  to  the  perils  of  unknown 
seas  and  almost  constant  war  between  England  and  France. 

Five  years  later,  that  is,  in  1752,  Wyndham  Beawes  pub- 
lished his  Lex  Mercatoria  Rediviva,  or,  A  Complete  Code  of  Com- 
mercial Law,  a  second  edition  of  which  was  printed  in  London 
in  1 761.  Insurance  takes  up  almost  sixty  pages  in  this 
treatise  and  the  references  include  every  branch  of  the  business, 
too  elaborate  to  be  reproduced  here  but  they  indicate  as  clearly 
as  possible  that  on  the  part  of  this  distinguished  writer 
insurance  was  held  to  be  an  integral  and  indispensable  element 
of  commerce  and  commercial  intercourse. 

Trade  and  Commerce  Defined. 

In  1755  Richard  Rolt  published  the  first  edition  of  "A 
New  Dictionary  of  Trade  and  Commerce,"  including  an  ex- 
planation of  all  terms  used  in  commerce,  in  which  he  makes 
extended  reference  to  insurance.  He,  like  many  others,  drew  a 
distinction  between  commerce  and  navigation,  which  terms  by 
many  writers  are  not  used  interchangeably,  as  has  since  been 
the  case  in  interpretations  of  the  commerce  clause  of  the  Con- 
stitution. With  reference  to  navigation  and  its  relation  to 
insurance,  Rolt  says  that  "  In  navigation,  considered  as  a  part 
of  the  skill  of  the  merchant,  is  included,  not  so  much  the  art  of 


*  Science  of  Insurance,  by  Corbyn  Morris,  p.  i,  et  seq. 

107 


INSURANCE   AS   AN   ELEMENT   OF   EARLY   COMMERCE 

steering  a  ship,  as  the  knowledge  of  the  seacoast  and  of  the  different 
ports  to  which  the  cargoes  are  sent,  the  customs  to  be  paid,  the 
passes,  permissions  or  certificates  to  be  procured,  the  hazards 
of  every  voyage,  and  the  rate  of  insurance.'** 

Rolt  gave  a  definition  of  commerce  which  is  very  broad 
and  comprehensive,  namely  that  "Commerce  is  the  exchange 
of  commodities,  or  the  buying,  selling,  or  trafficking  of  merchan- 
dise, money,  or  even  paper  for  acquisition  of  profit."  He  specif- 
ically refers  to  bills  of  exchange  as  commerce,  and  insurance  is 
defined  as  "  The  security  given  in  consideration  of  a  sum  of  money 
paid  in  hand  to  make  good  ships,  merchandise,  and  houses,  to 
the  value  of  that  for  which  the  premium  is  received  and  in  case 
of  loss  by  storm,  pirates,  fires,  and  the  like."  As  thus  defined, 
insurance  strictly  falls  within  his  previous  definition  of  com- 
merce. Referring  at  the  same  time  to  abuses  resulting  from  a 
miscarriage  of  effort  in  the  development  of  insurance  practice, 
he  remarks  that,  **  Though  insurance  was  intended  for  the 
encouragement  and  security  of  trade,  it  has  been  frequently 
changed  into  a  wager,  to  the  great  prejudice  of  commerce." 
That  his  conception  of  the  commercial  value  of  insurance  was 
not  limited  to  the  marine  branch  is  made  evident  by  a  passage 
which  reads  that  **  The  establishment  of  these  several  offices  of 
insurance  from  fire  had  been  extremely  beneficial  to  society; 
nothing  was  ever  so  well  calculated  for  the  encouragement  of 
trade,  nor  was  there  ever  any  scheme  so  well  adapted  for  the 
securing  of  private  property." 

*  In  this  connection,  mention  may  be  made  of  a  discussion  of  Insur- 
ance and  Average,  in  "The  Merchants  and  Shipmasters'  Assistant," 
by  Jos.  Blunt,  New  York,  1832,  which  includes  chapters  on  Bills  of 
Exchange,  Freight  and  Demurrage,  Insurance  and  Average,  Pensions, 
etc.  There  is  also  an  extended  discussion  of  the  Law  of  Marine  Insur- 
ance and  General  Average  in  "  The  American  Shipmasters'  Guide  and 
Commercial  Assistant,"  by  Francis  G.  Clarke,  Boston,  1838.  But  much 
earlier  than  this,  the  subject  of  Marine  Insurance  was  dealt  with  at 
length  in  "  The  Practical  Navigator,"  by  John  Hamilton  Moore,  ist 
American  Edition,  printed  at  Newburyport,  1799. 

108 


insurance  as  an  element  op  early  commerce 

The  Foremost  op  Insurance  Classics. 

By  far  the  most  important  treatise  ever  published  on 
insurance,  particularly  at  a  time  when  a  comprehensive  treat- 
ment of  the  subject  was  of  imperative  importance  to  aid  in  the 
establishment  of  insurance  upon  a  sound  and  enduring  basis, 
was  the  "Essay  on  Insurance"  by  Nicholas  Magens,  a  mer- 
chant of  Hamburg,  published  in  two  volumes  in  1755.  The 
work  will  ever  remain  a  classic  of  the  highest  merit  in  insur- 
ance literature.* 

The  first  volume  explains  the  nature  of  the  various  kinds 
of  insurance  practiced  by  the  then  commercial  States  of  Europe, 
and  showing  their  consistency  or  inconsistency  with  equity  and 
the  public  good.  The  second  volume  is  a  collection  of  all  the 
foreign  ordinances  of  insurances  and  forms  of  policies  translated 
into  English,  with  remarks  on  such  parts  as  are  obsolete  or 
defective.  An  English  edition  of  this  work  was  published  in 
London  in  1755,  at  which  time  Magens,  apparently,  was  a 
resident  of  that  city.  The  first  volume  contains  a  brief  state- 
ment of  the  principles  of  business  morality,  which  should  not 
only  underlie  insurances,  but  all  commercial  relations:  "The 
true  scope  and  intention  of  all  well-calculated  commercial  laws 
is,  to  unite  the  interest  of  every  individual  in  such  a  manner, 
as  that  the  whole  community  may  be  induced  to  act  for  the 
general  good.  If  this  principle  be  adhered  to,  and  a  due  execu- 
tion of  those  laws,  and  an  impartial  administration  of  justice, 
follow;  the  merchant,  who  should  be  considered  as  the  first 
mover,  and  the  great  spring  of  action  in  trade,  will  cheerfully 
pursue  extensive  views;  and  by  his  fortune,  credit,  and  industry, 
advance  the  public  weal." 

Relation  op  Early  Commerce  to  Insurance. 

The  work  is  of  so  comprehensive  a  nature  that  it  is  difficult 
to  make  a  selection  of  extracts  which  would  do  justice  to  this 
distinguished  writer  and  his  advanced  views  upon  the  importance 

♦An  Essay  on  Insurance  by  Nicholas  Magens,  London,  1755,   2  Vols. 
(This  work  is  in  the  Ins.  Library,  Boston,  Mass.) 

109 


INSURANCE    AS   AN   ELEMENT   OF   EARLY   COMMERCE 

and  dignity  of  insurance  as  a  commercial  institution.  He 
discourses,  among  other  subjects,  upon  the  utiHty  of  insurance, 
in  language  which  is  full  of  meaning  even  at  the  present  time: 
"Insurances  promote  trade  and  navigation,  as  thereby  the  risks 
of  diligent,  industrious,  and  inventive  persons,  of  small  capitals, 
are  so  lessened,  that  they  may  engage  even  in  important  under- 
takings. It  is  easily  understood  how  the  public  are  benefited 
thereby;  and  by  taking  such  precaution,  as  making  insurance,  a 
gre  ater  share  of  confidence  too  is  acquired  among  moneyed  men, 
who  seeing  this  wary  way  of  proceeding  of  the  merchant,  are  the 
more  ready  to  assist  him  with  their  money,  or  to  maintain  his 
credit,  by  freely  taking  his  bills  of  exchange.  But  though  this 
be  allowed,  yet  as  the  best  institutions  are  subject  to  abuse, 
certain  bounds  and  regulations  are  necessary,  which,  while  they 
give  such  latitude  as  may  promote  and  encourage  trade,  ought 
not  to  be  so  extremely  wide  as  that  ill  consequences  may  ensue. 
That  this  consideration  should  be  attended  to  in  enacting  all  laws 
and  ordinances  relating  to  insurances,  is  not  to  be  controverted; 
nor  that  it  should  also  be  had  in  view,  in  the  explanation  and 
application  of  those  laws  to  particular  cases.  In  our  essay  we 
shall  do  our  utmost  to  point  out,  whatever  experience  has  shown 
to  deserve  attention,  and  in  what  respects  there  seems  to  have 
been  either  too  much,  or  too  little,  latitude  given."  The 
limitation  of  space  makes  it  impossible  to  give  additional  illus- 
trations from  this  remarkable  work,  but  it  contains  by  far  the 
soundest  reasoning  up  to  that  time  on  the  whole  question 
that  insurance  is  an  element  of  commerce  by  the  practice  and 
usage  of  the  commercial  nations  of  the  world. 

Insurance  Essential  to  Commercial  Security. 

In  1757  Postlethwayt  published  the  second  edition  of  his 
Classical  Dictionary  of  Commerce,  in  two  large  volumes,  chiefly 
based  upon  the  French  Dictionary  of  Commerce  by  Savary. 
From  this  and  the  fourth  edition  of  the  same  work,  which  was 
published  in  1774,  the  following  extracts  are  quoted,  as  illus- 
trating that  in  the  mind  of  this,  one  of  the  foremost  writers  of 

no 


INSURANCE   AS    AN    ELEMENT   OP   EARLY   COMMERCE 

his  day,  insurance  formed  an  essential  element  of  the  commerce 
of  the  period.  The  work,  among  other  subjects,  in  the  words 
of  the  author,  treats  "Of  the  compilation  of  annuities  on  lives, 
leases  and  reversions,  of  insurance  of  shipping  and  merchandise, 
with  great  variety  of  curious  cases  relating  to  this  essential  part 
of  mercantile  commerce — ^with  a  political  discussion  of  the  point 
of  the  insuring  the  ship  and  merchandise  of  commerce  in  time 
of  war." 

The  author  quotes  at  length  from  a  Royal  Message  to 
Parliament,  in  1720,  relating  to  the  charter  of  the  Royal  Ex- 
change and  London  Assurance  companies,  stating  in  part  as 
follows:  "  His  Majesty  having  received  several  petitions  from 
great  numbers  of  the  most  eminent  merchants  of  the  City  of 
London,  humbly  praying  that  he  would  be  graciously  pleased  to 
grant  them  letters  patent  for  erecting  corporations  to  assure 
ships  and  merchandise  ....  (and)  His  Majesty  being  of  opinion 
that  erecting  two  such  corporations  ....  for  assuring  ships 
and  merchandise  under  proper  restrictions  and  regulations  may 
he  of  great  advantage  and  security  to  the  trade  and  commerce  of 
the  kingdom,  is  willing  and  desirous,  etc.,  etc." 

Assurance  or  Insurance. 

**  Insurancing,"  he  remarks  in  continuation,  is  a  great 
encouragement  to  foreign  commerce,  seeing  that  it  takes  the 
weight  of  the  hazard  off  from  individuals  and  lays  it  upon 
numbers,  yet  these  numbers  are,  upon  the  whole,  gainers  by 
undertaking  the  hazard."  .  .  .  .  "  The  security  of  our  trade,  and 
in  consequence  thereof  lessening  our  own  insurancing  and  raising 
that  of  our  enemies  are  of  such  important  concernment  to  the 
nation  that  it  may  not  be  unacceptable  to  observe  how,  in  time 
of  war  with  France,  a  few  ships  of  war  may  be  employed  to 
answer  these  purposes."  **  Assurance,  or  Insurance,  a  term 
in  commerce,  particularly  foreign.  It  signifies  a  security,  or 
assurance,  given,  in  consideration  of  a  sum  of  money  paid, 
in  hand,  of  so  much  per  cent,  to  an  insurer,  or  assurer,  to  in- 
demnify the  insured  from  such  losses  as  shall  be  specified  in 

zzz 


INSURANCE    AS   AN    ELEMENT   OF   EARLY   COMMERCE 

policy  of  assurance,  subscribed  by  the  insurer,  or  insurers,  for 
that  purpose."  "  This  being  a  point  of  very  great  importance 
to  our  trading  interests,  is  the  reason  of  dwelHng  so  long  upon  it; 
for  which  we  pray  rather  to  have  the  approbation  than  censure 
of  our  readers.  In  regard  to  the  nature  of  insurance  in  foreign 
countries,  we  shall  represent  them  in  their  proper  places." 
"  Bottomry,  is  a  marine  contract  in  commerce,  for  the  borrowing 
of  money  upon  the  keel  or  bottom  of  a  ship ;  that  is  to  say,  when 
the  master  of  a  ship  binds  the  ship  itself,  that,  if  the  money 
be  not  payed  by  the  day  appointed,  the  creditor  shall  have  the 
said  ship;  and  this  taking  up  money  on  bottomry  is  commonly 
in  nature  of  mortgaging  a  ship;  and,  in  the  instrument  executed 
between  the  lender  and  the  borrower,  there  is  a  clause  which 
expresses,  that  the  ship  is  engaged  for  the  performance  of  the 
same." 

This  writer  also  refers  to  the  Act  of  George  II,  1746,  relating 
to  insurance,  in  which  occurred  the  sentence,  *'  For  the  encour- 
agement of  trade."  [Vol.  i,  p.  146]  He  also  quotes  from  the 
famous  case  of  Sadlers  Company  vs.  Badcock,*  decided  at 
this  time,  containing  the  statement  ''and  though  in  cases  of 
commerce -policies  oi  insurance  are  allowed  to  be  made,  etc.,  etc.," 
all  of  which  sufficiently  confirms  the  view  that  Postlethwayt, 
as  well  as  Savary,  considered  insurance  an  element  of  commerce, 
even  though  not  perhaps  a  species  of  commerce  itself. 

Development  of  the  Law  of  Insurance. 

The  accession  of  Lord  Mansfield  to  the  Court  of  Kings 
Bench  as  Chief  Justice,  in  1756,  marked  a  new  era  in  English 
and  American  insurance  law,  and  the  decisions  and  opinions  of 
this  distinguished  jurist  distinctly  stamp  the  insurance  contract 
as  a  commercial  transaction  subject  to  interpretation  by  the  Law 
Merchant.  No  subsequent  writer  on  insurance  law  has  failed 
to  refer  in  praise  to  Lord  Mansfield  for  his  transcending  wisdom 

*  The  case  of  Sadlers  Company  vs.  Badcock  in  Chancery,  Easter 
Term,  16  Geo.  II,  is  given  in  full  in  Postlethwayt's  Dictionary,  Vol. 
I,  p.  147. 

112 


INSURANCE   AS   AN   ELEMENT   OF   EARLY   COMMERCE 

and  discriminating  ability,  but  for  the  present  purpose  it  must 
be  sufficient  to  quote  a  brief  extract  from  Vance,*  as  bearing 
upon  the  definition  of  insurance  as  an  element  of  commerce. 
"  This  great  judge,  [Lord  Mansfield]  appreciating  the  peculiar 
circumstances  that  attended  the  making  of  mercantile  contracts,  and 
the  importance  of  considering  the  usages  and  customs  of  mer- 
chants as  determining  their  rights  under  such  contracts,  began 
a  consistent  effort  to  import  into  the  common  law  such  of  the 
principles  of  the  Law  Merchant  as  would  render  the  common 
law  suitable  for  the  administration  of  justice  in  regard  to  com- 
mercial rights.  In  order  to  determine  what  rules  should  be 
applied  in  deciding  these  causes,  he  looked  to  the  various 
authorities  that  were  in  vogue  on  the  Continent,  such  as  have 
been  mentioned  above,  and  also  had  special  juries  empaneled  to 
determine  the  customs  of  English  merchants."  And  it  is  to 
Lord  Mansfield  that  insurance  is  indebted  for  the  dictum  that 
"  All  questions  of  mercantile  law,  but  more  particularly  of  policies 
of  insurance,  are  extremely  important  and  ought  to  be  settled." 
The  necessity  for  certainty  in  legislation  and  uniformity  in 
rulings  and  regulations  governing  insurance  transactions  was 
fully  as  well  recognized  when  this  was  written,  at  the  very  be- 
ginning of  the  modern  business  of  insurance  in  its  various  branches, 
as  it  is  true  of  the  state  of  the  business  at  the  present  time. 

Bills  op  Exchange  and  Promissory  Notes. 

In  1759,  Mr.  Thomas  Cunningham,  of  London,  published  a 
treatise  on  **  The  Laws  of  Bills  of  Exchange,  Promissory  Notes, 
Bank  Notes,  and  Insurances."  The  title  itself  sustains  the  view 
that  the  writer  considered  insurance  as  strictly  a  commercial 
transaction  and  by  implication  an  essential  and  important 
element  of  commerce.  In  fact,  writers  on  the  origin  and  history 
of  bills  of  exchange  often  refer  to  the  subject  in  connection  with 
insurance.  Among  others,  the  earlier  laws  and  ordinances  of 
Barcelona,  according  to  Beckmann,t  refer  to  bills  of  exchange 

*  Law  of  Insurance,  St.  Paul,  Minn.,  1904,  p.  8,  et  seq. 
t  Dictionary  of  Inventions,  Vol.  II,  p.  203. 

113 


INSURANCE   AS   AN    ELEMENT   OF   EARLY   COMMERCE 

in  a  general  discussion  of  **  the  maritime  trade  and  other  branches 
of  commerce."  Brokers  engaged  in  joint  financial  and  com- 
mercial transactions,  as,  for  illustration,  in  Philadelphia  as 
early  as  1792,  often  styled  themselves  **  Exchange  and  Insur- 
ance Brokers."  In  all  matters  of  this  kind  American  commercial 
practice  and  usage  has  largely  followed  foreign  methods.  Thus 
the  institution  of  Lloyds  Coffee  House,  which  was  the  centre 
of  English  individual  underwriting,  was  copied  in  a  similar 
establishment  erected  in  Philadelphia  under  the  title  *'  London 
Coffee  House,"  in  1762,*  and  at  which  the  original  lists  of 
shipping  and  marine  intelligence,  furnished  by  Lloyds  of 
London,  were  made  available  to  personal  underwriters  in 
Philadelphia. 

In  the  nature  of  the  case,  the  value  of  insurance  is  in  exact 
proportion  to  the  risk  assumed.  During  the  last  quarter  of 
the  1 8th  Century  the  most  important  commercial  nations  of 
the  world  were  at  war  with  one  another  and  the  American 
colonies  were  in  successful  revolt  against  the  mother  country. 
International  commerce  and  navigation  were  most  hazardous 
undertakings,  for  ships  and  goods  were  not  only  exposed  to  the 
perils  of  the  sea,  but  even  to  the  more  uncertain  and  more 
hazardous  risks  of  capture  and  destruction  by  the  enemy. 
Bottomry  loans  in  Massachusetts  in  1767  brought  twenty  per 
cent.,  and  in  Salem  in  1777,  the  rate  paid  for  marine  insurance 
was  seventy-five  per  cent.  Laws  of  shipping  and  insurance 
were  rather  a  matter  of  mercantile  custom  and  of  the  good 
faith  of  the  underwriters  than  of  statutory  enactment.  Fraud 
was  common  and  the  need  of  codification  and  of  severe  penalties 
was  forcibly  presented  in  the  masterly  treatise  of  Weskett,t  pub- 
lished in  1 781.  No  more  elaborate  work  than  this  on  insurance 
has  appeared  since  that  date.  It  is  a  remarkably  clear  and 
comprehensive  exposition  of  the  principles  and  practice  of 
insurance  in  its  particular  relation  to  commercial  enterprise. 

*  History  of  Insurance  Company  of  North  America,  p.  21,  et  seq. 
t  "A   Complete  Digest  of  the  Theory,  Laws,  and  Practice  of  Insur- 
ance, John  Weskett,  merchant,  London,  1781. 

114 


insurance  as  an  element  op  early  commerce 

The  First  Comprehensive  Dictionary  op  Insurance. 
The  work  of  Weskett*  is  practically  a  comprehensive  diction- 
ary of  insurance,  containing  a  concise  enumeration  of  all  the 
terms  which  were  in  common  use  at  the  time,  with  a  full  ex- 
planation of  the  practices  and  usages  of  every  branch  of  in- 
surance as  then  known  and  understood.  In  an  elaborate  intro- 
duction Weskett  presents  an  outline  of  the  whole  philosophy, 
science  and  law  of  insurance,  which  has  not  its  counterpart 
in  any  subsequent  treatise  upon  the  subject.  The  rightful 
position  of  insurance  as  an  element  of  commerce  is  set  forth 
by  Weskett  in  the  following  suggestive  sentence: 

"  The  great  utility  of  insurance,  by  means  of  which  the 
value  of  property,  in  almost  every  situation,  howsoever  preca- 
rious, may  be  rendered  safe  against  accidents,  is  so  universally 
acknowledged,  that  there  needs  no  attempt  to  prove,  or  explain 
it.  Commerce  is  indubitably  the  grand  source,  from  whence  is 
derived  all  that  enriches,  strengthens,  and  adorns  a  State. 
Without  an  extensive  and  flourishing  commerce,  this  nation 
could  never  have  arisen  to  that  superlative  degree  of  grandeur 
in  arts,  arms,  and  wealth,  which  have  made  her  the  envy,  and, 
till  lately,  the  veneration  of  all  other  maritime  States;  and 
without  insurance  that  commerce  could  neither  have  been  pro- 
moted, nor  carried  on;  nor  can  it  ever  proceed,  unsupported 
by  insurance;  and,  consequently,  the  national,  as  well  as 
private  advantage  of  well-regulated  insurance  is  obvious  and 
indisputable." 

An  Early  Plea  for  Insurance  Education. 

The  magnitude  of  the  subject  of  insurance  even  at  this 
early  time  suggested  the  necessity  of  qualified  inquiry  and 
study  of  the  essential  facts.  Weskett  suggests,  therefore,  that, 
in  his  opinion, 

"  It  would  seem,  therefore,  that  little  argument  is  necessary 
to  show  that  every  possible  countenance  and  aid,  both  public 
and  private,  ought  to  be  given  to   the  attainment  and  culti- 

*A  Complete  Digest  of  the  Theory,  Laws,  and  Practice  of  Insurance, 
John  Weskett,  merchant,  London,  1781. 

IIS 


INSURANCE   AS   AN   ELEMENT   OP   EARLY   COMMERCE 

Nation  of  the  knowledge  and  just  practice  of  insurance ;  as  the 
primary  and  principal  means  by  which  the  maritime  and  com- 
mercial interests  of  these  Kingdoms  can  be  maintained,  cher- 
ished, and  enlarged;  and  the  property  of  the  merchants,  and, 
consequently,  of  all  the  other  traders,  manufacturers,  and 
artisans,  who  depend  on,  or  are  immediately  connected  with 
them,  can  be  rendered  secure  and  permanent." 

The  need  of  qualified  inquiry  into  the  principles  and  philos- 
ophy of  insurance  is  further  brought  out  in  a  sentence  which 
holds  as  true  at  the  present  time  as  it  did  at  an  earlier  date. 

**  There  is  scarcely  any  other  occupation,  or  profession, 
though  far  more  unimportant,  and  less  abstruse  or  complicate 
than  that  of  insurance,  amongst  the  whole  circle  of  arts  and 
commerce  exercised  in  this  Kingdom,  where  some  method  of 
instruction  is  not  looked  upon  as  requisite;  and,  where  the 
persons  employed  in  it  are  not  pretty  well  versed  in  the  grounds 
and  theory,  and  the  greater  part  of  them  expert  in  the  practice 
of  the  principles  on  which  it  ought  to  be  prosecuted: — but, 
one  may  venture  to  assert  that  in  no  other  class  is  there  to  be 
perceived  so  great  a  proportion  of  a  numerous  body  of  prac- 
titioners, who  are  so  incompetently  skilled  in  the  nature  of  the 
matters  about  which  they  are  occupied,  and  of  the  laws  and  rules 
by  which  they  ought  to  be  governed,  as  amongst  those  who  are 
in  the  actual  employment  of,  and  whose  avocations  and  concerns 
are  immediately  connected  with,  affairs  of  insurance." 

Cognizance  in  Law  of  Common  Knowledge  in 
Matters  of  Insurance. 

The  law  of  insurance  at  this  time  was  still  in  a  very  un- 
satisfactory state,  but  as  a  general  principle  the  Law  Merchant 
was  relied  upon  to  settle  controversies  between  the  insurers  and 
the  insured.  Referring  to  the  legal  aspects  of  insurance  in 
matters  of  commerce,  Weskett  remarks: 

'"  "  From  whence  is  it  that  the  most  profound  adepts,  and 
sages  of  the  law,  derive  their  fancied  superiority  of  skill,  in  the 
rules  of  justice,  in  matters  of  commerce  and  insurance?  Hath 
it  not,  always,  been  from  the  informations  and  explanations 
of  experienced  and  judicious  merchants  and  insurers ;  from  time 
to  time  given,  in  the  several  cases,  which  have  been  introduced, 

xi6 


INSURANCE   AS   AN   ELEMENT   OP   EARLY   COMMERCE 

discussed,  and  decided  in  courts  of  judicature? — and,  what 
lamentable  absurdity,  and  confusion  of  ideas,  might  not  have 
-been  observed,  in  the  argumentations  there,  upon  such  matters! 
— yet,  do  we  not,  sometimes,  idly  look  up  to,  as  oracles,  those, 
whom  intelligent  men  amongst  ourselves  have,  in  reality,  in- 
structed ?  Those  affairs  are  often  accompanied  with  such  new 
and  various  circumstances  and  contingencies;  and  depend 
so  much  upon  nice  distinctions  of  special  customs  and  usages; 
that  the  common  law  of  England  tacitly  acknowledges  its  own 
imperfection,  in  this  respect,  by  allowing  the  Lex  Mercatoria, 
i.  e.,  the  custom  of  merchants, — wherein  themselves,  only, 
are  properly  skilled;  and  of  which,  consequently,  themselves, 
only,  can  be  the  proper  judges, — to  pass  as  law." 

Drawbacks  and  Duties,  Smuggling  and  Piracy. 

These  and  other  innumerable  remarks  and  observations  by 
Weskett  fully  establish  the  strictly  commercial  origin  of 
insurance  and  its  great  utility  in  the  commercial  development 
of  the  period.  Among  the  particular  subjects  considered  in 
much  detail  are  the  insurance  aspects  of  drawbacks  and  duties 
on  goods  and  freight,  of  robbery  of  goods  insured,  of  smuggling 
and  prohibited  goods,  all  involving  insurance  considerations, 
some  of  which  are  now  obsolete  or  mere  matters  of  curiosity. 
Considering  always  the  disturbed  condition  of  the  time  and 
almost  unceasing  warfare  between  great  nations,  the  insecurity 
of  the  sea,  the  widespread  practice  of  smuggling  and  the  arbi- 
trary enforcement  of  ill-advised  commercial  regulations,  it  is 
but  natural  that  the  necessary  degree  of  security  against  probable 
loss  in  commercial  enterprises  of  many  kinds  should  have  been 
sought  in  the  practice  of  insurance. 

Questions  of  piracy,  ransom,  letters  of  marque,  neutral 
ships,  passports  and  hostage,  all  had  their  important  insurance 
aspects,  made  evident  not  only  by  the  theoretical  discussions, 
but  by  the  numerous  cases  decided  in  courts  of  law.  In  the 
case  of  Goss  vs.  Withers,  Lord  Mansfield  said  that  in  Spain, 
Venice  and  England  the  goods  go  to  the  captor  of  a  pirate,  against 
the  owner,  as  there  can  be  no  condemnation  to  entitle  the  pirate ; 
a  capture  by  a  pirate,  or  a  capture  under  a  commission,  where 

117 


INSURANCE   AS   AN   ELEMENT   OP   EARLY   COMMERCE 

there  is  no  war,  does  not  change  the  property;  yet,  as  between 
insurer  and  insured,  they  are  just  upon  the  same  foot  as  the 
captures  by  an  enemy.  It  was  then  the  practice  to  insure  against 
the  loss  of  personal  freedom  through  capture  by  pirates  and  the 
Ordinance  of  France  permitted  this  to  be  done,  providing  that 
"  Those  who  shall  redeem  captives  may  insure  on  them  the 
price  of  their  ransom,  which  the  insurers  shall  pay  if  on  their 
way  back  they  should  be  re-taken,  killed,  drowned,  or  if  they 
die  otherwise  than  by  a  natural  death." 

Privateering  and  Rates  of  Insurance. 

The  common  practice  of  privateering  during  a  time  of 
maritime  war  often  led  to  disastrous  results  to  shipping,  which 
required  the  extensive  use  of  maritime  insurance  to  grant 
the  necessary  degree  of  security  to  commerce  by  sea.  Privateers 
being  private  ships  of  war  fitted  out  for  the  particular  purpose 
of  destroying  the  commerce  of  the  enemy  and  subject  only  to 
the  law  of  nations,  more  or  less  ill-defined,  it  was  permitted 
by  an  English  statute  to  make  "assurance  on  private  ships  of 
war  fitted  out  by  His  Majesty's  subjects  solely  to  cruise  against 
his  enemies,  and  such  assurances  might  be  made  by  or  for  the 
owners,  interest  or  no  interest,  free  of  average,  and  without 
benefit  of  salvage  to  the  insurer. '  **  Endless  complications  ensued 
out  of  this  practice,  chiefly  because  of  a  disputed  state  of  fact, 
always  more  or  less  difficult  to  determine  even  by  the  most 
searching  inquiry.  A  discussion  of  the  proper  function  of  in- 
surance in  maritime  war  would  require  separate  and  extended 
consideration.  The  subject  has  found  its  most  practical  illus- 
tration in  the  so-called  French  Spoliation  Cases,  a  large  number 
of  which  involved  considerations  of  insurance. f 

*  Statute  19,  George  II,  chap.  37,  sec.  2;   see  Weskett,  p.  413. 

t  For  a  full  and  very  convenient  account  of  the  French  Spoliation 
Claims,  with  special  reference  to  insurance  companies,  see  "  Statements 
and  Papers  before  the  Committee  on  Claims  of  the  House  of  Represen- 
tatives, on  House  Bill  22534,  6ist  Congress,  2nd  Session,  March  30, 
1910,  including  statement  of  J.   Henry  Scattergood,   President  of  the 

118 


insurance  as  an  element  of  early  commerce 

The  Liverpool  Privateers. 

The  distinction  between  piracy  and  privateering  is  never 
very  precise,  at  least  not  in  many  of  the  cases  which  have  found 
their  ultimate  settlement  in  the  courts.  In  no  field  has  this  been 
more  clearly  brought  out  than  in  the  history  of  the  privateers 
and  the  slave  trade  of  Liverpool  during  the  period  beginning 
with  1744  and  ending  with  181 2.  The  law  of  prizes  makes  the 
distinction  of  ships  and  goods  taken  by  letters  of  marque,  those 
taken  from  pirates  or  sea  rovers,  and  those  taken  from  professed 
enemies.  The  jurisdiction  of  such  cases  comes  within  the  practice 
of  the  courts  of  admiralty  which  from  the  earliest  times  have 
taken  cognizance  of  insurance.  The  Ordinances  of  Hamburg 
provided  that  "  Any  person  who  in  time  of  war  buys  a  prize, 
that  has  not  yet  been  in  any  free  or  neutral  river  or  port,  and 
makes  insurance  on  the  same,  is  obliged  to  express  that  circum- 
stance in  the  policy,  for  want  thereof,  the  insurance  shall  be 
deemed  to  have  no  efficacy  or  value."  Even  the  question  of 
re-capture,  that  is,  where  a  ship  in  her  voyage  happens  to 
be  taken  by  an  enemy,  and  afterwards  is  re-taken  by  another 
ship  in  amity  and  restoration  is  made  and  she  proceeds  on  her 
voyage,  frequently  involved  considerations  of  insurance,  as 
brought  out  in  the  case  of  Pringle  vs.  Hartly,  decided  as 
early  as  1744.* 

Insurance  on  Trade  With  the  Enemy. 

War  in  every  case  has  the  most  profound  and  immediate 
effects  on  commerce,  disturbing,  as  it  does,  the  friendly  rela- 
tions of  nations  and  leading  to  prohibition  of  intercourse,  em- 
bargo acts,  etc.  What  constitutes  a  state  of  war  is  sometimes 
very  difficult  of  exact  definition,  never  so  well  illustrated  as  in 
the  case  of  our  own  French  Spoliation  cases,  which  occurred 

Insurance  Company  of  the  State  of  Pennsylvania,  and  Bayard  Henry, 
Attorney  for  Directors  of  the  Insurance  Company  of  North  America/' 
Washington,  Government  Printing  Office,  1910. 

*  The  case  of   Pringle  vs.   Hartley  is  discussed  in   Park's   "  System 
of  the  Law  of  Marine  Insurance,"   7th  Edition,  Vol.  I,  p.  232. 


INSURANCE   AS   AN   ELEMENT   OP   EARLY   COMMERCE 

without  a  specific  declaration  of  war  against  France.  Insurance 
on  any  trade  with  the  enemy,  or  insurance  on  prohibited  goods, 
is  contrary  to  public  policy,  and  expressed  in  the  principle  that 
**This  interdiction  of  commerce  with  enemies  comprehends  also 
the  prohibition  of  insuring  the  effects  which  belong  to  them, 
whether  they  be  loaded  on  board  their  own  vessels,  or  those 
of  friends,  allies,  or  neutral  subjects;  for  to  insure  the  property 
of  enemies,  or  to  trade  with  them  directly  or  indirectly  is,  in 
effect,  the  same  thing."  This  principle,  derived  from  the 
French  Ordinances  of  commerce,  and  marine,  was  not  accepted 
by  England  in  the  war  of  1756,  when  it  was  held  that  England 
"would  not  consider  the  prohibition  of  insurance  as  necessarily 
included  in  that  of  commerce,"  since  they  constantly  insured 
French  ships  and  their  cargoes  as  in  time  of  peace,  whether 
they  were  destined  for  the  French  colonies,  or  any  other  ports 
of  France,  or  those  of  neutral  nations."  This,  however  did  not 
prevent  the  captured  ships  from  being  declared  good  prizes, 
but  the  result  of  it  was,  in  the  words  of  a  French  commentator, 
that,  "one  part  of  the  nation  restored,  by  the  effect  of  insurance, 
what  the  other  took  away  by  the  right  of  war."  Naturally 
considerations  of  this  kind  include  the  whole  subject  of  con- 
traband goods  and  the  principle  that  free  goods  make  free  ships. 
Within  more  recent  times  the  foregoing  considerations  have 
found  their  application  to  concrete  problems  arising  out  of  the 
War  of  the  Rebellion,  the  Alabama  Claims,  and  the  results  of 
the  war  between  Russia  and  Japan.  Reference  may  here  be 
made  to  the  case  of  Richardson  vs.  Maine  Insurance  Company, 
decided  in  1809,  in  which  the  American  doctrine  of  insurance 
in  its  relation  to  commerce  in  war  is  clearly  defined.  The  subject 
itself  is  one  of  much  controversy,  but  for  the  present  purpose 
it  is  sufficient  to  have  brought  out  the  very  intimate  relation 
which  has  ever  existed  and  ever  will  exist  between  the  practice 
of  insurance  and  the  carrying  on  of  international  commerce 
during  a   time   of  maritime   war. 

The  great  work  of  Weskett,  from  which  most  of  the  imme- 
diately   preceding    observations    and    conclusions    have    been 

120 


INSURANCE   AS   AN   ELEMENT   OP   EARLY  COMMERCB 

derived,  was,  in  1787,  followed  by  a  treatise  entitled  "A  State- 
ment of  the  Law  of  Marine  Insurance,  with  Chapters  on  Bot- 
tomry, etc.,"  by  Mr.  James  Allan  Park.  This  work  was  the  first 
comprehensive  and  systematic  dissertation  on  the  law  of  insur- 
ance in  England,  and  a  standard  authority  for  many  years  in  the 
United  States.  An  advertisement  in  the  American  newspapers 
of  the  period,  inviting  proposals  to  print  an  American  edition 
of  this  work,  contains  the  statement  that  it  was  the  most 
complete  work  on  the  subject  and  that  it  contained  all  the 
important  decisions  ever  made  in  England  on  insurance.* 

First  Systematic  Treatise  on  Insurance  Law. 

John  Duer,  one  of  the  foremost  American  authorities  on  tha 
law  and  practice  of  marine  insurance,  writing  in  1845,  observed 
with  reference  to  the  work  of  Park,  that  it  was  entitled  "to  the 
praise  of  being  the  first  endeavor  to  reduce  the  English  law  of 
insurance  to  the  order  of  a  regular  science."  The  far-reaching 
influence  of  this  work  on  American  judicial  practice  is  made 
evident  by  frequent  references  to  this  authority  in  cases  de- 
cided in  American  courts.  Written  at  a  time  when  the  law  of 
insurance  itself  was  in  a  much  more  formative  state  than  it  is 
now,  the  influence  of  Park  was  naturally  very  great.  Available 
at  the  period  when  the  American  constitution  was  under  con- 
sideration, and  when  by  every  authority  of  the  day  insurance 
was  considered  an  element  of  commerce  and  an  integral  part 
thereof,  the  following  remarks  therefrom  on  the  commercial 
aspects  of  insurance  and  its  relation  to  the  commercial  trans- 
actions  of   the   period   are   decidedly  suggestive. 

"  In  most  of  the  commercial  countries  abroad,  it  is  partic- 
ularly expressed,  either  in  their  ordinances  or  policies,  and 
sometimes  in  both,  that  the  risk  of  the  insurers  shall  commence, 
the  moment  the  goods  quit  the  shore,  and  shall  continue  till 
they  are  landed  at  the  place  of  their  destination "t 

♦"Account  of   the    Early   Insurance    Offices  in    Massachusetts  from 
1738  to   1801,"  by  E.  R.  Hardy,  Boston,   1901,  p.  90. 

t  Park,  System  of  the  Law  of  Marine  Ins.,  7th  Ed.,  Vol.  I,  p.  28. 

121 


INSURANCE   AS   AN    ELEMENT   OP   EARLY   COMMERCE 

"It  should  seem,  that  by  the  common  law  and  usage  of  mer- 
chants, any  person  whatever  might  be  an  insurer,  however 
unable  he  might  be,  from  poverty,  to  make  up  the  losses 
insured  against,  provided  the  merchant  was  weak  enough  to 
trust  to  such  a  security.  In  process  of  time,  however,  there 
were  so  many  who  made  a  show  of  great  wealth,  in  order 
to  deceive  the  honest  and  unsuspicious  trader  out  of  his 
premiums,  and  who  were  in  insolvent  circumstances,  that  it 
became  an  object  of  national  concern,  and  parliamentary  inter- 
ference. The  mischiefs  then  existing  in  this  branch  of  trade,  and 
the  dangerous  consequences  thence  arising  to  the  interests  of 
the  country,  are  to  be  collected  from  the  preamble  of  the 
statute,  which  passed  in  the  reign  of  George  the  First,  to  remedy 
these  evils,  and  which  has  in  some,  though  not  in  any  great 
degree,  restrained  the  rule  of  the  common  law  as  to  the  un- 
limited right  any  man  or  body  of  men  had  to  become  insurers."* 

Insurance  in  Naval  and  Commercial  Jurisprudence. 

Park  having,  no  doubt,  made  a  careful  study  of  the  French 
ordinances  of  commerce  and  marine  enacted  during  the  reign 
of  Louis  XIV,  under  the  auspices  of  Colbert,  as  minister  of 
finance,  refers  to  these  codes  and  their  authors,  as  follows: 
"  In  order  to  gain  a  proper  insight  into  the  true  effects  of  com- 
merce upon  the  various  nations  of  the  world,  and  the  advantages 
of  some  particular  branches  of  trade,  he  procured  and  employed 
learned  and  diligent  men  to  inquire  into  the  commercial  his- 
tories of  cities  long  since  destroyed,  and  the  nature  of  the  cli- 
mate, soil  and  productions  of  the  countries  then  rising  into 
notice.  It  was  to  this  spirit  of  inquiry  in  this  famous  statesman 
[Colbert],  that  the  world  is  indebted,  as  appears  from  the 
dedication,  for  that  very  masterly  performance  upon  the  commerce 
and  navigation  of  the  ancients,  written  by  Huet,  Bishop  of 
Avranches  and  Soissons,  who  is  justly  entitled  to  a  high  rank 
among  men  of  letters.     Colbert  having  thus  made  use  of  the 

*  6  George   I,   Chap.  i8.     See  7th  Edition,  Park,  "  A  System  of  the 
Law  of  Marine  Insurances,"  Vol.  I,  p.  5. 

122 


INSURANCE   AS    AN    ELEMENT   OF   EARLY   COMMERCE 

labors  of  others  in  order  to  gain  useful  information,  undertook 
to  restore  the  navy  and  commerce  of  France;  and  he  completed 
all  his  services  by  the  publication  of  that  ancient  body  of  sea 
laws  known  by  the  name  of  the  Ordinances  of  Louis  XIV, 
which  comprehended  everything  relating  to  naval  or  com- 
mercial jurisprudence ;  and  oj  which  the  doctrine  of  insurances 
forms  a  considerable  part.  To  its  merit  all  Europe  has  borne 
testimony;  and  the  name  of  Colbert  must  ever  be  mentioned 
with  respect,  when  the  Ordinances  of  Louis  XIV  are  the  subject 
of  conversation."* 

While  the  work  of  Park  became  most  widely  known,  there 
was  published,  however,  during  the  same  year  an  equally 
important  treatise  on  the  elements  of  law  relating  to  insurance, 
by  John  Millar,  of  Edinburgh,  which  contains  some  very  im- 
portant observations  on  the  relation  of  insurance  to  commerce. 
As  observed  by  this  author,  the  progress  of  commercial  im- 
provement has  been  accompanied  by  a  corresponding  extension 
of  mercantile  law,  leading  first  to  the  regulation  of  navigation 
only,  but  at  a  subsequent  period  to  the  regulation  of  insurance 
and  other  maritime  contracts.  He  remarks  that  "the  utility 
of  a  contract  of  this  nature  in  commercial  nations  is  great  and 
strong.  The  underwriter  who  promises  to  be  responsible  for 
the  danger  attending  the  conduct  of  any  branch  of  trade 
receives  a  consideration  proportionate  to  the  risk  he  under- 
takes and,  therefore,  derives  a  reasonable  profit  from  that 
employment  of  stock.  On  the  other  hand,  the  merchant,  by 
abandoning  a  share  of  his  expected  gain  is  freed  from  the  appre- 
hension of  a  loss  that  might  be  ruinous  to  him.  The  under- 
writer is  thus  enabled  to  participate  in  the  profits  of  every 
different  concern.  He  becomes  a  sort  of  temporary  partner 
of  the  most  extensive  trading  companies."  Recognizing  the  im- 
portant relation  of  insurance  to  the  general  welfare,  the  author 
observes,  in  continuation  of  the  preceding  remarks,  that  **  Insur- 
ance is  no  less  advantageous  to  the  public  than  to  individuals 
by  modifying  and  diffusing  the  profits  of  trade  and  by  preventing 

*  Park,  System  of  the  Law  of  Marine  Ins.,  7th  Ed.,  Vol.  I,  p.  xxxiv 

123 


INSURANCE   AS   AN   ELEMENT   OP   EARLY   COMMERCE 

incidental  misfortunes  from  operating  to  the  ruin  of  individuals 
or  companies  of  merchants  which  might  obstruct  the  uniform 
progress  of  commerce  and  endanger  public  credit." 

Insurance  in  Actual  Commerce. 

Outside  of  the  field  of  law  and  legal  controversies  arising 
out  of  differences  of  opinions  regarding  the  nature  and  effects 
of  the  insurance  contract,  there  is  abundant  evidence  in  the 
every-day  commercial  transactions  of  the  period  and  the  com- 
mentaries on  commercial  practice,  that  insurance  in  the  minds 
of  merchants  was  never  separated  from  the  subject  of  com- 
merce itself.  In  1788  there  was  published  in  Edinburgh  an 
interesting  "Introduction  to  Merchandise,"  by  Robt.  Hamilton, 
which  includes  an  account  of  the  trade  of  Great  Britain  and  the 
laws  and  practice  relating  to  sale,  factorage,  insurance,  bills 
of  exchange,  bankruptcy,  etc.  Insurance  is  defined  as  "a 
contract  whereby  one  party  engages  to  pay  the  loss  which 
the  other  may  sustain  for  a  stipulated  premium  or  consideration. 
The  most  common  sorts  are  insurance  against  the  dangers  of  the 
sea,  insurance  against  fire,  insurance  of  debts,  and  insurance 
on  lives."  Bottomry  bonds  are  defined  as.  contracts  partly  in 
the  nature  of  borrowing  on  interest  and  partly  in  the  nature 
of  insurance.  Respondentia  contracts  are  defined  as  being  of 
the  same  kind,  but  secured  on  goods  instead  of  the  ship,  the 
condition  of  re-payment  being  that  the  goods  did  not  perish 
through  the  hazards  of  the  sea.  The  observations  include 
calculations  of  cases  in  actual  practice,  a  brief  discussion  of 
the  doctrine  of  chances  and  annuities  on  lives.  The  volume 
makes  it  evident  that  the  commercial  education  of  men  at  this 
early  period  was  not  considered  complete  without  an  under- 
standing of  the  fundamental  principles  of  insurance,  of  the 
theory  of  insurance  in  all  its  branches,  and  the  application  of 
established  principles  to  everyday  practice,  and  the  law  of  the 
subject  as  determined  by  the  courts.* 

♦  For  an  interesting  illustration  of  the  place  of  insurance  in  actual 
commerce,  reference  may  be  made  to  "  A  New  and  Easy  Method  of 

124 


insurance  as  an  element  of  early  commerce 

The  Insurance  Company  of  North  America. 

Marine  insurance  in  America  previous  to  the  Revolution 
was  exclusively  a  matter  of  individual  underwriting  and  it 
was  not  until  1792  that  the  first  association  was  formed 
originally  with  the  title  of  the  Universal  Tontine,  subsequently 
changed  to  that  of  the  Insurance  Company  of  North  America. 
In  agitating  for  the  organization  of  a  corporation^  one  of  the 
promoters  pointed  out  that  his  extended  experience  as  a  policy- 
holder entitled  him  to  foresee  the  great  possibilities  of  a  large 
association  engaging  in  the  business  of  underwriting  the  ven- 
tures of  American  citizens  in  the  growing  commerce  of  the  port 
of  Philadelphia.  Attention  was  directed  to  the  frequency  of 
defalcation  on  the  part  of  individual  underwriters  and  the 
superior  value  of  a  well-established  corporation  with  a  sufficient 
capital.  Individual  underwriting  as  it  had  become  well-estab- 
lished in  London  at  Lloyds'  Coffee  House,  found  its  counterpart 
in  America,  where  certainly  as  early  as  1762  advertisements 
gave  public  notice  of  the  opening  in  Philadelphia  of  an  insurance 
office  for  insuring  shipping  and  merchandise  at  the  London  Coffee 
House.  As  early  as  1759,  there  was  in  New  York  an  insurance 
office  at  a  house  adjoining  the  Merchants'  Coffee  House,  where 
risks  were  advertised  to  be  underwritten  at  moderate  premiums. 
Gradually  competition  increased  and  a  lowering  of  rates  resulted 
in  the  underwriter's  inability  to  meet  his  losses.  That  the 
practice  of  underwriting  in  America  at  this  early  date  was  quite 
extensive  is  made  conclusively  evident  by  the  collection  of  manu- 
script data,  including  insurance  books  and  papers,  preserved 
by  the  Pennsylvania  Historical  Society,  and  covering  under- 
writing accounts  from  1768  to  1774. 

The  petition  in  1 793  to  incorporate  an  insurance  company  was 
promptly  acted  upon  by  the  General  Assembly  of  Pennsylvania 
and  in  a  report  of  a  special  committee  appointed  to  consider  the 
matter,  occurs  the  important  and  extremely  suggestive  statement, 

Bookkeeping;  or,  Instructions  for  a  Methodical  Keeping  of  Commer- 
cial Accounts,"  by  Alexander  Brodie,  London,  1722,  which  gives  numer- 
ous illustrations  of  the  place  of  insurance  in  actual  commerce. 

MS 


INSURANCE   AS   AN   ELEMENT   OF   EARLY   COMMERCE 

that  "  no  commerce  or  navigation  could  be  beneficially  conducted 
without  insurance,  nobody  choosing  to  commit  considerable 
property  to  the  ocean  without  guarding  against  the  numerous 
accidents  to  which  it  would  be  thereby  exposed. ' '  The  opposition 
of  private  underwriters  prevailed  to  delay  favorable  action, 
but  a  charter  was  finally  granted  after  a  further  report  had 
been  made  by  a  committee  of  the  Legislature,  which,  among 
other  interesting  observations,  states  that  **As  it  is  impossible 
for  a  merchant  with  safety  to  hazard  unprotected  his  property 
on  so  uncertain  an  element  as  water,  which  is  so  liable 
to  prejudice  or  endanger  it,  it  becomes  essential  to  the  farmer, 
miller,  or  manufacturer,  that  he  should  insure  it.  Insurance 
is  an  undertaking  on  the  part  of  one  or  more  individuals,  in  pro- 
portions to  the  surtis  they  respectively  take  or  subscribe,  to  bear 
harmless  the  merchants  in  their  export  trade.  The  cheaper 
insurance  is  done,  the  better  price  the  farmer  or  manufacturer 
will  obtain;  for  this  being  one  of  the  charges  in  transportation 
of  the  surplus  it  must,  of  necessity,  be  understood  or  reckoned 
in  the  valuation  of  it."  No  argument  in  favor  of  the  contention 
that  insurance  is  an  element  of  commerce  and  an  integral  part 
thereof,  could  be  framed  in  more  concise  and  convincing  lan- 
guage than  this  plea,  written  in  1794,  or  five  years  after  the 
adoption  of  the  Constitution. 

The  French  Spoliation  Cases. 

The  charter  establishing  the  Insurance  Company  of  North 
America  was  granted  on  the  first  of  April,  1794.  From  that 
date  to  this  the  history  of  the  company  has  been  one  of  the 
most  honorable  in  the  annals  of  American  commerce  and  insur- 
ance. From  the  outset  the  corporation  became  an  influential 
fsLctor  in  promoting  American  commercial  enterprise  at  a  time 
of  great  peril,  not  only  arising  out  of  the  dangers  of  navigation, 
but  even  more  so  out  of  the  almost  world-wide  state  of  war. 
As  the  result  of  the  war  between  England  and  France,  in  which 
the  United  States  assumed  a  position  of  neutrality,  enormous 
depredations   were   committed   upon   American   commerce   by 

126 


INSURANCE   AS   AN   ELEMENT   OF   EARLY   COMMERCE 

French  men-of-war  and  privateers,  which  the  nation  at  that 
time  was  not  in  a  position  to  prevent.  After  the  close  of  the 
war  in  1801  a  settlement  was  made  by  offsetting  joint  liabili- 
ties on  the  part  of  France  and  the  United  States,  in  return 
for  which  the  latter  assumed  the  obligation  towards  its  citizens 
to  make  ample  restitution  for  the  losses  sustained  as  the  result 
of  French  depredations.  These  claims  have  gone  down  in  his- 
tory as  the  French  Spoliation  Claims,  with  a  literature  of  their 
own  and  innumerable  Congressional  considerations  extending 
throughout  the  long  intervening  period  of  time. 

The  bearing  which  these  claims  have  on  the  subject  of 
insurance,  which  in  most  cases  covered  the  ship  and  its  cargo 
unlawfully  seized,  is  partly  made  evident  in  the  practical  diffi- 
culties confronting  the  Insurance  Company  of  North  America, 
arising  out  of  a  state  of  war,  which  at  times  imperiled  its 
very  existence.  The  losses  sustained  by  the  company  were 
extremely  heavy  and  the  slow  communications  made  it  impos- 
sible to  estimate  with  accuracy  the  actual  liabilities  incurred. 
The  company  accordingly  appointed  a  committee  to  confer 
with  the  Insurance  Company  of  the  State  of  Pennsylvania  and 
private  underwriters,  to  consider  what  steps  were  necessary  to 
jointly  protect  their  respective  interests,  and  at  a  subsequent 
meeting  it  was  decided  to  decline  thereafter  the  underwriting 
of  any  marine  risk,  excepting  peace  risks,  and  upon  the  condi- 
tion that  this  action  be  adopted  by  the  other  insurers  in  Phila- 
delphia. The  recommendation  was  not  carried  into  effect  and 
on  October  8th,  1795,  a  committee  was  appointed  to  wait  upon 
the  Secretary  of  State,  to  ascertain  the  true  state  of  affairs. 
On  June  19th,  1798,  it  was  agreed  not  to  insure  to  French 
ports,  except  with  a  warranty  against  capture  and  seizure  by 
the  French.  The  total  amount  of  the  losses  incurred  by  the 
company  on  this  account  were  estimated  at  nearly  two  million 
dollars.  One  hundred  and  ten  years  have  passed  and  these 
claims  have  not  as  yet  been  all  disposed  of.  The  history  of  the 
Insurance  Company  of  North  America,  and  the  Insurance  Com- 
pany of  the  State  of  Pennsylvania,  however,  very  forcibly  illus- 

127 


INSURANCE   AS   AN   ELEMENT   OF   EARLY   COMMERCE 

trate  the  close  connection  existing  at  this  early  date  between 
the  carrying  on  of  commerce  by  sea  during  a  time  of  war  and 
the  secure  protection  of  such  commerce  by  insurance. 

Insurance  in  the  Diplomatic  Correspondence  of  the 
Revolution. 

It  is  not  only,  however,  from  the  records  of  the  Insurance 
Company  of  North  America  that  evidence  is  available  to  prove 
the  commercial  aspect  of  insurance  during  the  revolutionary 
period  of  the  seventeen  years  following  the  peace  of  1783. 
In  the  diplomatic  correspondence  of  the  Revolution  are  to  be 
found  various  references  to  insurance  and,  among  others,  a  letter 
dated  August  i8th,  1776,  by  Silas  Deane,  written  from  Paris  to 
the  Committee  on  Secret  Correspondence,  which  contains  the 
interesting  statement  that  insurance  from  London  to  Jamaica 
was  20%.  In  a  subsequent  letter,  dated  October  29th,  1776, 
Deane  wrote  to  the  Committee  on  Secret  Correspondence,  also 
from  Paris,  that  "The  appearance  of  American  cruisers  in  those 
seas  (that  is,  near  the  coast  of  France)  has  amazed  the  British 
merchants  and  insurance  will  now  be  on  the  whole  establish- 
ment. This  will  give  the  rival  nations  a  great  superiority  in 
commerce,  of  which  they  cannot  be  insensible."  Very  much 
to  the  same  effect  is  a  statement  in  a  letter  from  Arthur  Lee, 
written  from  Philadelphia  under  date  of  September  9th,  1777, 
to  the  Committee  of  Foreign  Affairs.  After  referring  to  the 
effect  on  British  commerce  of  American  cruisers,  and  the  neces- 
sity on  the  part  of  British  merchants  to  carry  on  their  commerce 
with  other  nations  in  neutral  bottoms,  and  the  expedients  to 
screen  their  merchandise  in  this  manner,  Lee  remarks,  "I  say 
screen,  because  they  cannot  expect  that,  according  to  the  law 
of  nations,  it  will  be  a  protection  when  discovered.  They 
have  been  driven  to  this  necessity  by  the  number  of  successes 
of  these  (American)  cruisers  in  and  about  the  channel;  which 
has  raised  insurance  so  high  that  their  manufactures  are  in 
danger  of  being  augmented  thereby,  in  their  price,  too  mnch 
for  the  European  markets."     Here,  again,  in  language  as  con- 

128 


INSURANCE   AS   AN    ELEMENT   OP  EARLY   COMMERCE 

cise  as  it  can  be  expressed,  the  fact  of  insurance  as  an  element 
of  commerce  is  clearly  emphasized  as  a  matter  of  practical  ex- 
perience in  commercial  affairs. 

A  comprehensive  review  of  insurance  as  an  element  of 
early  commerce  would  extend  far  beyond  the  present  purpose. 
As  pointed  out  in  the  comments  upon  the  work  of  Weskett, 
insurance  is  more  or  less  an  element,  or  factor,  in  all  that  per- 
tains to  commercial  development  and  intercourse  during  times 
of  peace  or  war.  The  subject  of  French  Spoliation  alone  fur- 
nishes a  most  fruitful  source  of  information,  warranting  the 
conclusion  that  early  American  commerce  could  not  have  been 
carried  on  as  it  was  carried  on,  nor  could  it  have  attained  to 
the  dignity  of  a  great  carrying  trade  if  it  had  not  been  for 
marine  insurance.  This  principle  is  clearly  enunciated  in  inter- 
national law,  where  insurance  has  often  figured  as  an  essential 
element  in  commercial  disputes  arising  out  of  international 
conflicts  or  misunderstandings. 

Insurance  in  International  Arbitrations. 

John  Bassett  Moore  in  his  History  and  Digest  of  Inter- 
national Arbitrations  to  which  the  United  States  has  been  a  Party, 
with  reference  to  the  "  French  Indemnity  of  183 1,"  wrote  that 

"  The  principal  cases  in  which  claims  were  held  to  have 
been  invalidated  by  the  claimants  themselves  were  those  in  which 
there  was  an  omission  to  seek  the  relief  provided  by  the  con- 
vention of  1800,  either  by  failure  to  bring  the  case  before  the 
proper  tribunal  or  to  produce  the  necessary  proofs,  or  in  which 
the  claimant  had  accepted  an  indemnity,  though  an  insufficient 
one,  from  France;  or,  most  numerous  of  all,  in  which  the  loss 
was  borne  by  insurers.  In  the  last  case  the  insurer  was  treated 
as  having  acquired  pro  tanto  an  interest  in  the  fund;  but  if  he 
happened  to  be  a  foreigner  he  was  held  to  be  excluded  by 
alienage,  and  his  payment  for  the  loss  operated  as  'an  absolute 
relief  to  the  fund.'  "    (Vol.  V,  p.  4481). 

The  Case  of  the  Schooner  Polly. 

The  bearing  of  these  considerations,  which  are  amplified 
in  the  treatise  referred  to,  is  brought  out  in  the  numerous 

129 


INSURANCE    AS   AN   ELEMENT   OP   EARLY   COMMERCE 

cases  of  French  Spoliations,  individually  considered,  of  which 
the  following  may  serve  as  a  typical  illustration:  The  Schooner 
Polly  sailed  on  a  commercial  voyage  from  Boston,  Mass.,  on 
the  13th  day  of  May,  1799,  bound  for  Jamaica.  While  peace- 
fully pursuing  said  voyage  she  was  seized  on  the  high  seas,  on 
or  about  the  loth  day  of  June  following  by  the  French  LfCtter 
of  Marque  Clementine  of  Guadaloupe  and  a  prize  crew  placed 
on  board  with  orders  to  conduct  said  vessel  to  Porto  Rico. 
On  the  next  day  the  Polly  was  recaptured  from  the  French 
by  British  vessels  and  carried  to  the  Island  of  Tortola  and 
condemned  by  the  court  of  Vice-Admiralty  held  in  the  Road 
Town  of  said  island,  to  pay  a  salvage  of  one-sixth  of  the  gross 
value  of  said  vessel  and  cargo,  together  with  costs.  There- 
after in  pursuance  of  said  decree  said  vessel  and  cargo  were 
sold,  the  amount  realized  after  payment  of  salvage  and  ex- 
penses being  $3,546.11.  The  Polly  was  a  duly  registered  vessel 
of  the  United  States  and  was  built  in  the  year  1798  and  owned 
by  citizens  in  the  United  States  residing  in  Massachusetts. 
The  cargo  consisted  of  miscellaneous  merchandise  and  the 
losses  to  the  owners  by  reason  of  the  seizure  of  vessel  and  cargo 
were  estimated  at  $10,875.02,  of  which  $92-5.00  represented  the 
premium  paid  for  insurance.  Deducting  from  this  sum  the 
$3,546.11  received  from  the  sale  of  the  vessel  after  paying 
salvage  and  costs,  and  the  insurance  received  from  the  insuring 
underwriters,  amounting  to  $4,794.45,  the  net  loss  to  the  owners 
of  ship  and  cargo  was,  therefore,  $2,534.46.  The  policy  of 
insurance  was  an  underwriter's  contract  in  return  for  a  pre- 
mium of  10%.  The  chief  loss,  therefore,  fell  upon  the  insurers, 
claim  having  been  brought  under  the  French  Spoliation  Act 
of  1885  by  the  heirs  of  the  persons  who  suffered  loss  through 
the  capture  of  the  Polly  and  it  having  been  specifically  statad 
in  the  claim  that  the  claimants  in  their  respective  capacity 
as  owners  of  said  claim  disavowed  any  claims  on  account  of 
insurance  paid.  The  decision  of  the  Court,  filed  on  March 
31st,  1902,  was  that  "The  Court  decides  as  conclusions  of  law 
that  it  does  not  appear  that  the  said  seizure  was  illegal  and 

130 


INSURANCE   AS   AN    ELEMENT   OP   EARLY   COMMERCE 

that  the  owners  and  insurers  had  no  valid  claim  for  indemnity 
therefor  upon  the  French  government  prior  to  the  ratification 
of  the  contention  between  the  United  States  and  the  French 
Republic,  concluded  on  the  30th  day  of  September,  1800,  and 
that  the  claimants  are  not  entitled  to  recover  from  the 
United  States." 

Insurance  as  an  Element  op  Ancient  and 
Modern  Commerce. 

Cases  like  the  foregoing  clearly  illustrate  the  commercial 
aspects  of  insurance,  particularly  in  a  time  of  war.  It  is  abso- 
lutely certain  that  without  insurance  such  commerce  as  is 
represented  by  cases  of  this  kind  would  not  have  been  carried 
on  at  all,  in  that  no  considerations  of  profit  to  be  earned  on 
sales  to  be  made  would  be  sufficiently  attractive  to  balance 
the  enormous  risk  incurred  by  the  perils  of  the  sea  and  pos- 
sible capture  by  the  enemy.  In  consideration  of  a  moderate 
premium  of  only  10%  this  particular  transaction  was  under- 
taken as  a  matter  of  commerce  and  the  insurance  considera- 
tion constitutes,  therefore,  an  essential  element  of  the  transac- 
tion as  a  whole.  What  is  true  of  the  commerce  in  time  of  war 
at  the  end  of  the  eighteenth  century  is  equally  true  of  commerce 
on  an  extensive  scale  throughout  the  whole  recorded  period 
since  insurance  first  was  introduced  in  the  form  of  bottomry 
loans  during  the  times  of  the  Rhodians.  What  is  true  of 
insurance  as  an  element  of  commerce  during  the  revolutionary 
war  and  the  depredations  upon  American  commerce  during 
the  war  between  England  and  France,  is  equally  true  of  insur- 
ance as  an  element  of  commerce  throughout  the  whole  subse- 
quent history  of  commercial  development.  In  fact,  the  diffi- 
culty of  establishing  this  contention  is  not  the  paucity  but 
rather  the  preponderating  mass  of  material,  consisting  of 
commercial  documents,  commercial  transactions,  treaties,  nego- 
tiations, and  even  considerations  of  values  and  drawbacks,  fees 
and  bills  of  lading,  as  well  as  commercial  credit  in  every  form 
as  it  has  been  perfected  within  modern  times.     When,   there- 

131 


INSURANCE   AS   AN    ELEMENT   OF   EARLY   COMMERCE 

fore,  Alexander  Hamilton,  in  1791  included  policies  of  insur- 
ance as  matters  of  commerce  which  might  be  regulated  by 
the  Federal  government,  he  spoke  with  a  perfect  knowledge 
of  the  standard  authorities  of  the  day  on  both  commerce  and 
insurance.*  That  Hamilton  was  fully  familiar  with  these  works 
is  made  evident  by  the  fact  that  in  his  pay-book,  which  he  kept 
as  Commander  of  the  State  Company  of  Artillery  (1776),  there 
are  numerous  notes  concerning  the  books  which  made  up  his 
library,  and  among  these  he  mentions  Lex  Mercatoria,  Ralt's 
Dictionary  of  Trade  and  Commerce,  Postlethwayt,  and  Dr. 
Halley's  Table  of  Observations,  including  comments  by  himself. 
The  modem  mind,  no  doubt,  yields  itself  with  great  reluctance 
to  a  painstaking  inquiry  of  this  kind,  but  it  is  no  less  a  duty 
to  establish  the  truth  in  a  matter  of  business  history  and 
methods  than  in  the  numerous  and  much  more  conflicting  and 

♦  Hamilton's  Official  Opinion  as  Secretary  of  the  Treasury  on  the 
Constitutionality  of  a  United  States  Bank  has  been  reprinted  in  full 
in  "  Legal  Masterpieces,"  edited  by  vanVechten  Veeder,  Vol.  I,  St. 
Paul,  Minn.,  p.  214,  et  seq.  The  qualifications  of  Hamilton  as  a  lawyer 
familiar  with  the  subject  of  insurance  are  concisely  set  forth  in  the  fol- 
lowing passage  in  Kent's  "  Commentaries  on  American  Law":  *'  Mari- 
time law  in  these  states  became  early  and  anxioUsly  an  object  of  pro- 
fessional research.  It  we  take  the  reports  of  New  York  in  chronological 
order,  we  shall  find  that  the  first  five  volumes  occupy  the  period  when 
Alexander  Hamilton  was  a  leading  advocate  at  our  bar.  That  accom- 
plished lawyer  (for  it  is  in  that  character  only  that  I  am  now  permitted 
to  refer  to  him)  showed,  by  his  precepts  and  practice,  the  value  to  be 
placed  on  the  decisions  of  Lord  Mansfield.  He  was  well  acquainted 
with  the  productions  of  Valin  and  Emerigon;  and  if  he  be  not  truly  one 
of  the  founders  of  the  commercial  law  of  this  state  he  may  at  least  be 
considered  as  among  the  earliest  of  those  jurists  who  recommended 
those  authors  to  the  notice  of  the  profession,  and  rendered  the  study 
and  citation  of  them  popular  and  familiar.  His  arguments  on  commer- 
cial as  well  as  on  other  questions  were  remarkable  for  freedom  and 
energy;  and  he  was  eminently  distinguished  for  completely  exhausting 
€very  subject  which  he  discussed,  and  leaving  no  argument  or  objection 
on  the  adverse  side  vinnoticed  and  unanswered.  He  traced  doctrines  to 
their  source,  or  probed  them  to  their  foundations,  and  at  the  same  time 
paid  the  highest  deference  and  respect  to  soimd  authority." 

14th  Ed.,  Vol.  3,  p.  31. 

132 


INSURANCE   AS    AN    ELEMENT   OP   EARLY   COMMERCE 

far  less  practical  matters  of  historical  research  for  its  own  sake. 
For  this  reason,  and  in  behalf  of  the  truth  of  history,  these  facts 
have  here  been  brought  together  from  authentic  sources  of  the 
highest  rank,  to  establish  beyond  controversy  the  fact  that  in 
the  commerce  and  commercial  intercourse  preceding  the  adoption 
of  the  American  constitution  insurance  was  held  to  be  an  element 
of  commerce,  an  instrumentality  thereof  and  an  all-important 
part,  without  which  such  commerce  or  commercial  intercourse 
and  subsequent  commercial  development  would  not  have  been 
possible.  There  is  nothing  in  the  subsequent  history  of  a  hun- 
dred and  twenty  years  of  American  and  international  commerce 
to  disprove  the  contention  that  insurance  holds  to-day,  as  in 
the  past,  an  important  place  in  commercial  enterprize  and 
that  it  is,  in  theory  and  in  fact,  an  essential  element  and  instru- 
mentality thereof. 

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Ireland.     Insurance,  pp.  135,  174,  193.     London. 

1855  Smith,  John  William;  A  Compendium  of  Mercantile  Law.    Third 

edition  enlarged  and  revised  by  James  P.  Holcombe  and  Wil- 
liam Y.  Gholson.     Insurance,  p.  410  et  seq.     New  York. 

1855  Butts,  I.  R.;  U.  S.  Law  Cabinet,  comprising  the  Business  Man's 

Assistant  and  Ready  Reckoner.  The  Merchant  Shipper's 
Assistant,  or  Common  Carriers'  Guide.  Marine  insurance, 
pp.  54-88.     Boston. 

1856  Parsons,  Theophilus,  LL.  D. ;  The  Elements  of  Mercantile  Law. 

Insurance:  marine,  pp.  403-487;  fire,  pp.  488-539;  life,  p.  540 
et  seq.     Boston. 

136 


INSURANCE   AS   AN   ELEMENT   OP   EARLY   COMMERCE 

1856     Tecklenborg,    H. ;    Handlexikon     fur    Rheder,    Versicherer    und 

Schiff  sea  pita  ine.     Bremen. 
1856     Insurance  Commissioners  of  Massachusetts,  First  Annual  Report. 

Boston. 

1856  Sharswood,  George;  Popular  lectures  on  Commercial  Law.    Marine 

insurance,  p.  211  et  seq.     Philadelphia. 

1857  Insurance  Commissioners  of  Massachusetts,  Second  Annual  Report 

of.     Boston. 
1857     Benton,  Thos.  H. ;  Abridgment  of  the  Debates  of  Congress,  from 
1789  to  1856.     16  vols.     New  York. 

1857  Coode,  George;  Report  to  the  Chancellor  of  the  Exchequer  on 

Fire  Insurance  Duties.     London. 

1858  Homans,  J.  Smith;  A  Cyclopedia  of  Commerce  and  Commercial 

Navigation.     Insurance,  pp.  103  7-1066.     New  York. 

1859  Street,  Alfred  B.;  The  Council  of  Revision  of  the  State  of  New 

York,  its  history,  a  history  of  the  courts  with  which  its  mem- 
bers were  connected;  biographical  sketches  of  its  members; 
and  its  vetoes.  Insurance,  pp.  345-347.  Albany. 
i860  Bateman,  William  O. ;  The  General  Commercial  Law,  as  recognized 
in  the  jurisprudence  of  the  United  States.  Insurance,  p.  986 
et  seq.     Philadelphia. 

1863  Upton,    Francis    H.;   The    Law   of    Nations  affecting   commerce 

during  war.     Third  edition.     New  York. 

1864  Statistics  of  the  Foreign  and  Domestic  Commerce  of  the  United 

States,  communicated  by  the  Secretary  of  the  Treasury.  In- 
surance, p.  184.     Washington. 

1864  Hansard's   Debates.     Alabama   Claims,   pp.   429,   467,   498,    544, 

618,  714,  956.  1053,  1462,  1476,  1544,  1595.  1778. 

1865  Proceedings    of    the    Commercial    Convention,    held    in    Detroit, 

July  11-14,  1865.    Insurance  charges,  pp.  210  and  211.    Detroit. 

1865  Hamon,  Henry;  New  York  Stock  Exchange  Manual.     Insurance 

stocks,  p.  387  et  seq.     New  York. 

1866  Ma yhew,  Ira;  Practical  Bookkeeping.    Insurance,  p.  140.    Boston. 
1866     Weller,  Louis;  Calculations  and  tables  of  equivalents  at  various 

rates  of  exchange  of  exports  and  imports  of  Great  Britain,  etc. 
Calculations  of  marine  and  fire  insurance,  p.  402  et  seq.  a 
vols.     Liverpool. 

1 87 1  Townsend,  Calvin;  A  Compendium  of  Commercial  Law.  Insur- 
ance: marine,  pp.  434-462;  fire,  pp.  463-476;  life,  pp.  477- 
488.     New  York. 

1 87 1  Beaman,  Charles  C.  Jr.;  The  National  and  Private  "Alabama 
Claims  "  and  their  *'  final  and  amicable  settlement  "  (including 
table  of  marine  insurance  war  rates,  etc.)     Washington. 

137 


INSURANCE   AS   AN   ELEMENT   OP   EARLY   COMMERCE 

1873  Moore,  Charles  B.;  The  Geneva  Award.  Insurance  Claims  and 
Especially  the  Claims' of  Mutual  Insurance  Companies.  New  York, 

187s  Ward,  J.  Langdon;  A  Reprint  of  some  of  the  Speeches  on  the 
Distribution  of  the  Geneva  Award,  First  Session,  XLIII  Con- 
gress.    New  York. 

1876  Lindsay,  W.  S. ;  History  of  Merchant  Shipping  and  Ancient 
Commerce.     4  vols.     London. 

1884  Lechartier,  E. ;  Dictionnaire  Pratique  des  Assurances  Terrestres. 
Paris. 

1888  Putzel,  Charles,  and  H.  A.  Bahr;  Commercial  Precedents  selected 
from  the  column  of  replies  and  decisions  of  the  New  York 
Journal  of  Commerce.     Hartford. 

1 89 1  Lioy,  Diodato;  The  Philosophy  of  Right  with  special  reference 
to  the  principles  and  development  of  law.  Translated  by  W. 
Hastie.     Insurance,  Vol.  i,  p.  286.     2  vols.     London. 

1896  Kent,  James;  Commentaries  on  American  Law.  Fourteenth 
edition,  edited  by  John  M.  Gould,  Ph.  D.  4  vols.  Boston. 
(Insurance,  Vol.  3.) 

1898  Spencer,  Edward  W.;  A  Manual  of  Commercial  Law.  Insur- 
ance, pp.  491-501.     Indianapolis  and  Kansas  City. 

1901  Grotius,  The  Rights  of  War  and  Peace,  including  the  Law  of 
Nature  and  of  Nations,  translated  by  A.  C.  Campbell,  A.  M. 
Insurance,  p.  156  et  seq.  Universal  Classics  Library,  Wash- 
ington and  London. 

1901  Wambaugh,  Eugene,  LL.  D.;  A  Selection  of  Cases  on  Insurance. 
Cambridge. 

1 90 1  Insurance  Library  Association,  Boston;  An  accoimt  of  the  early 

insurance  offices  in  Massachusetts,  from  1724  to  1801.     Boston. 

1902  Plass,    F. ;    Geschichte    der   Assecuranz   imd    der    Hanseatischen 

Seeversicherungs-BOrsen,  Hamburg,  Bremen,  Lubeck.  Hamburg. 

1904  Compilation  of  the  Treaties  in  Force.     Prepared  under  resolution 

of  the  Senate,  of  February  11,  1904,  pp.  403,  461,  583,  655. 
Washington. 

1905  Davis,  John   P.,   Ph.   D. ;  Corporations.     A  vstudy  of  the  origin 

and  development  of  great  business  combinations  and  of  their 
relation  to  the  authority  of  the  state.  Gilds,  Vol.  i,  p.  130 
etseq.    Insurance  companies.  Vol.  2,  p.  259.    2  vols.    New  York. 

1905  Meili,   F. ;  International  Civil  and  Commercial  Law  as  founded 

upon  theory,  legislation,  and  practice.  Translated  by  Arthur 
K.  Kuhn,  A.  M.  Insurance,  pp.  443,  448,  473,  525  et  seq. 
New  York. 

1906  Slater,  J.  A.;  The  Commercial  Law  of  England.     Insurance,  pp. 

143-153.     Pitman's  Commercial  Series.     London. 

138 

I 


INSURANCE   AS   AN   ELEMENT   OP  EARLY   COMMERCE 

1907  Atherley-Jones,   L.   A.,  and   Hugh   H.   L.   Bellot;   Commerce   in 

War.     Insurance,  pp.  414-416  and  587.     New  York. 

1908  Report  by  the  Committee  on  a  National  Guarantee  for  the  War 

Risks  of  Shipping  to  the  Lords  Commissioners  of  His  Majesty's 
Treasury.     (Cd.  41 61.)     London. 

1909  Hotchkiss,  William  H.,  Superintendent  of  Insurance,  New  York; 

Report  on  Town  and  County  Co-operative  Fire  Insurance 
Associations  of  New  York  State.     Albany. 

1910  Malloy,   William   M. ;  Treaties,   Conventions,   International  Acts, 

Protocols  and  Agreements  between  the  United  States  of  Amer- 
ica and  other  powers,  1 776-1909.     Washington.     2  vols. 

1 9 10  Scattergood,  J.  Henry,  President  of  the  Insurance  Company  of 
the  State  of  Pennsylvania,  and  Bayard,  Henry,  Atty.  for  direc- 
tors Ins.  Co.  of  North  America;  Statements  before  Committee 
on  Claims  of  the  House  of  Representatives  on  House  Bill  22534. 
6ist  Congress,  2nd  Session,  March  30,  1910.  The  French 
Spoliation  Claims,  with  special  reference  to  Insurance  com- 
panies.    Washington. 

1 910  International  Convention  relative  to  certain  Restrictions  on  the 
Exercise  of  the  Right  of  Capture  in  Maritime  War.  Signed 
at  The  Hague,  October  18,  1907.  Treaty  Series  No.  14.  (Cd. 
5118.)     London. 

1 9 10  International  Convention  relative  to  the  Status  of  Enemy  Mer- 
chant-Ships at  the  Outbreak  of  Hostilities.  Signed  at  The 
Hague,  October  18,  1907.  Treaty  Series  No.  10.  (Cd.  5031.) 
London. 


139 


CHAPTER  IV 

THE  ORIGIN  AND  GROWTH  OF  LAW  AND  LEGIS- 
LATION ON  INSURANCE. 

Insurance,  in  all  its  branches,  is  today  an  indispensable 
element  of  social  and  economic  security  and  progress.  The 
business,  within  the  last  half-century,  has  attained  to  such 
enormous  proportions  that  its  effective  supervision  and  control 
has  become  a  matter  of  serious  government  concern  throughout 
the  world.  It  requires  no  extended  inquiry  into  the  underlying 
principles  of  insurance  to  establish  the  fact  that  while  insurance 
policies  are,  Hke  ordinary  contracts,  enforcible  at  law,  they  have 
the  essential  characteristic  that  the  subject  matter,  or  a  material 
part  of  it,  "is  within  the  peculiar  knowledge  of  one  of  the  par- 
ties" and  that  "the  other  party  must  rely  to  a  considerable 
extent  upon  the  statements  made  by  him."  *  The  fundamental 
principle  which  governs  in  modem  conceptions  of  State  super- 
vision and  control  of  insurance  transactions  was  laid  down  by 
the  Select  Committee  of  the  House  of  Commons  on  Assurance 
Associations,  made  to  Parliament  in  1853.  It  was  said  in  this 
report  that 

"  On  the  one  hand,  even  admitting  the  general  wisdom  of 
the  principle  of  non-interference  on  the  part  of  the  Government 
in  matters  of  trade,  it  has  been  contended  that  the  question 
of  life  insurance  differs  so  materially  in  its  general  character  from 
ordinary  trading  transactions,  that  it  may  fairly  be  considered 
as  an  exception  to  that  rule.  This  exceptional  treatment  has 
been  justified  and  supported,  on  the  ground  that  the  obligations 
undertaken  by  such  associations  have  reference  to  a  very  remote 
and  uncertain  period;  that  the  object  which  persons  have  in 
view  in  effecting  insurances  upon  their  lives,  is  generally  of  an 

*  Principles  of  Contract,  by  R.  M.  Benjamin,  1889,  p.  73. 

140 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

important  and  solemn  character,  viz.,  the  provision  for  widows 
and  orphans  after  the  death  of  their  natural  protectors;  that, 
unlike  any  other  transaction  of  trade,  a  contract  once  entered 
into  cannot  be  discharged  or  abandoned,  if  doubts  of  the  sta- 
bility of  an  office  should  arise,  without  a  great  sacrifice  of  pre- 
miums paid  in  past  years,  and  the  necessity  of  effecting  new 
policies  in  other  offices  at  increased  rates  of  premium,  owing  to 
the  greater  age  of  the  assured;  and  that  in  the  present  state 
of  uncertainty  which  arises  from  the  imperfect  knowledge  as 
to  the  real  condition  of  assurance  offices,  persons  are  thus 
placed  in  the  anxious  and  unhappy  dilemma  of  being  com- 
pelled to  persevere  in  paying  premiums  from  year  to  year, 
with  some  suspicion  and  doubt  as  to  the  ultimate  advantage 
of  doing  so,  or  of  incurring  the  serious  loss  which,  under  the 
most  favorable  circumstances,  must  attend  the  abandonment 
or  sale  of  a  policy.  On  these  conditions,  as  a  special  case,  it 
has  been  contended  by  different  witnesses  of  great  experience, 
that  interference  on  the  part  of  the  Government  is  not  only 
justifiable,  but  a  matter  of  high  duty,  for  the  protection  and 
information  of  the  public." 

While  it  may  be  contended  to  the  contrary,  that  the 
business  of  insurance  forms  no  exception  to  ordinary  trading 
transactions,  the  foregoing  view  has  prevailed,  and  rightly  so, 
in  the  public  regulation  of  the  business  by  the  several  states 
in  the  United  States  and  by  the  supreme  authority  of  other 
governments  throughout  the  world. 

Exceptional  Nature  of  Insurance  Contracts. 

Insurance  contracts  are  properly  held  to  be  of  a  fiduciary 
nature  and  they  are  in  law  said  to  be  uberrimae  fidei  or 
agreements  of  the  most  perfect  good  faith.  In  contracts  or 
agreements  of  this  nature  it  is  assumed  as  a  first  consideration 
that  nothing  is  concealed  and  particularly  in  insurance  it  is  a 
principle  of  law  that  "the  insured  must  preserve  the  most  per- 
fect good  faith  toward  the  insurer."  The  contractual  relations 
of  the  parties  in  insurance  involve  the  highest  considerations 
of  public  policy  and  these  from  the  earliest  times  have  war- 
ranted or  justified  a  more  or  less  drastic  degree  of  governmental 
supervision,  interference  and  control.    The  ultimate  fulfillment 

141 


ORIGIN   AND   GROWTH   OP   LAW  AND   LEGISLATION 

of  deferred  pecuniary  obligations  of  this  kind  demands  at  the 
outset  some  evidence  of  financial  responsibility  in  the  assump- 
tion of  a  risk  and  at  least  a  reasonable  certainty  of  faithful 
stewardship  of  the  funds  accumulated  for  the  security  of  the 
insured.  Since  insurance,  as  the  term  is  now  understood, 
originated  in  the  practice  of  individual  underwriting,  or  the 
assumption  of  maritime  risk  on  the  part  of  financially  respon- 
sible individuals,  the  eariier  and  more  primitive  practice  led 
frequently  to  disputes  at  law  and  to  the  serious  disappointment 
of  the  insured  as  the  result  of  financial  irresponsibility  of  the 
insurers.  The  practice  of  insurance,  particularly  in  early  times 
and  especially  in  the  marine  branch  of  the  business,  also  offered 
peculiar  opportunities  for  fraud  and  even  crime,  which  accounts 
for  the  deliberate  interference  of  government,  almost  from  the 
time  of  the  inception  of  the  insurance  contract,  in  determining 
the  contractual  relations  of  parties,  as  well  as  the  nature,  func- 
tion and  purpose  of  the  contract  itself.* 

Long  before  the  insurance  contract,  as  now  in  use,  had 
been  perfected  to  a  degree  of  practical  utility  in  the  further- 

*  In  connection  with  an  historical  inquiry  into  the  commercial  law  of 
the  ancient  Hebrews,  the  following  expression  of  law  concerning  insur- 
ance as  an  element  of  mercantile  progress  was  discovered  in  the  Babylo- 
nian Talmud,  published  about  500  A.  D.,  by  one  of  the  contributors 
to  the  Jewish  Encyclopaedia : 

"  Our  Sages  have  taught:  When  a  ship  goes  upon  the  sea  and  a 
squall  strikes  her,  and,  in  order  to  lighten  her,  they  throw  some  of  the 
cargo  overboard,  they  make  their  calculation  not  according  to  the  money 
value,  but  according  to  the  weight  of  the  different  goods,  and  they 
should  not  depart  from  the  custom  of  skippers;  and  skippers  have  the 
right  to  contract,  that  whosoever  vessel  is  lost,  they  will  find  him  a  new 
vessel;  but  if  it  be  lost  through  his  fault,  they  do  not  find  another  vessel 
for  him,  nor  if  he  deviates  into  a  course  on  which  it  is  not  customary 
for  vessels  to  go." 

The  Babylonian  Talmud  is  a  current  discussion  about  the  Mishna,  a 
compilation  made  by  the  Patriarch  Rabbi  Jehudah  in  North  Palestine 
about  210  or  220  A.  D.,  of  the  traditional  or  "  Oral  Law  "  as  taught 
in  Palestine  down  to  his  time. 

The  foregoing  was  contributed  in  a  letter  to  the  New  York  Evening 
Post,  Oct.  5,  1902,  by  L.  N.  D. 

142 


ORIGIN   AND   GROWTH   OP   LAW   AND   LEGISLATION 

ance  of  merchant  adventures,  a  somewhat  similar  form  of 
contract,  known  as  bottomry  loans  and  respondentia  bonds,  had 
been  in  use,  from  time  out  of  mind,  among  the  trading  nations 
of  antiquity.  Bottomry  bonds  are  in  the  nature  of  a  mort- 
gage, by  which  the  owner  of  a  ship,  or  the  master  as  his  agent, 
borrows  money  for  the  use  of  the  ship,  or  for  a  specified  voyage, 
or  for  a  definite  period,  and  he  pledges  the  ship,  or  the  keel, 
or  bottom  of  the  ship,  as  a  security  for  its  repayment,  with 
maritime  or  extraordinary  interest,  on  account  of  the  marine 
risk  to  be  borne  by  the  lender,  it  being  stipulated  in  contracts 
of  this  kind  that  if  the  ship  be  lost  in  the  course  of  a  specified 
voyage,  or  during  a  limited  time,  by  any  of  the  perils  enumer- 
ated in  the  contract,  the  lender  shall  also  lose  his  money.  Be- 
cause of  the  great  risk  incurred  in  contracts  of  this  nature, 
absolutely  essential  and  indispensable  to  the  furtherance  of 
commerce  by  sea  in  early  times,  the  rate  of  interest  allowed 
was  considerably  in  excess  of  the  legal  rates  of  interest,  sub- 
ject later  to  the  limitations  of  the  usury  law. 

Papal  Decree  Prohibiting  Bottomry  Loans. 

On  this  account,  bottomry  loans  came  into  conflict  with 
the  usury  laws  of  the  Catholic  Church  and  as  early  as  1227 
A.  D.  there  is  record  of  a  papal  decree  prohibiting  bottomry 
loans,  as  contrary  to  the  principles  of  the  canon  law.  Since 
bottomry  loans  are  strictly  within  the  definition  of  insurance 
contracts,  this  decree  may  be  accepted  as  the  first  authentic 
instance  of  government  interference  and  regulation  of  insurance 
contracts.  The  view,  however,  which  the  early  ecclesiastical 
authorities  assumed  in  this  matter  was  opposed  to  commercial 
practice  and  usage,  for  it  was  held  that  "bottomry  is  not  a 
communication  for  the  loan  of  money,  but  a  partnership  for 
the  honest  intention  of  seeking  a  livelihood  by  trade,"  and 
that,  therefore,  "no  contract  is  usurious  where  the  lender  runs 
the  hazard  of  losing  all  his  money,  both  principal  and  interest, 

143 


ORIGIN   AND   GROWTH   OP   LAW   AND   LEGISLATION 

as  in  the  case  of  bottomry."  *  Bottomry  bonds  are  of  very 
limited  utility  today,  but  other  forms  of  insurance  contracts 
have  become  universal  instrumentalities  of  social  and  commer- 
cial progress  throughout  the  world.  The  principle  established 
in  prohibiting  by  papal  decree  the  issuance  of  insurance  con- 
tracts, considered  contrary  to  public  policy,  is  fundamentally 
the  same  which  underlies  all  subsequent  laws  and  legislation 
affecting  the  business  of  insurance.  Unfortunately,  the  early 
history  of  insurance  is  shrouded  in  much  mystery  and  only 
fragmentary  accounts  and  records  now  remain.  The  documen- 
tary proof  of  early  insurance  contracts  has  only  been  preserved 
in  a  few  isolated  instances  and  the  ancient  laws  and  ordinances 
are  not  extant  in  their  completeness,  nor  do  they  seem  to  have 
been  subjected  to  a  thorough  critical  examination  by  qualified 
experts  familiar  with  insurance  terms  and  usages  which,  nat- 
urally, during  the  long  intervening  period  have  undergone  ma- 
terial and  even  quite  radical  changes. 

Early  Laws  and  Ordinances. 

The  history  of  insurance,  in  fact,  cannot  be  read  apart 
and  distinct  from  the  history  of  commerce  and  navigation,  nor, 
in  fact,  from  the  history  of  the  legal  and  economic  progress  of 
civilized  nations  during  ancient  and  modem  times.  Laws  and 
ordinances  of  the  fourteenth  and  fifteenth  centuries,  for  illus- 
tration, which  have  reference  to  the  insurance  contract  and 
which  constitute  an  early  though  primitive  attempt  at  govern- 
ment regulation,  are  difficult  of  exact  interpretation  from 
modern  standpoints,  as  to  the  responsibility  of  government 
in  its  t-p.lation  to  insurance  interests. f  The  fact  must  never 
be  lost  sight  of,  that  the  practice  of  individual  underwriting 
was  not  replaced  by  corporate  underwriting  until  the  begin- 
ning of  the  eighteenth  century  and  that,  therefore,  early  statu- 
tory  requirements   have   reference   rather  to   the   conduct   of 

♦  Blydenburgh  on  Usury,  p.  33.     See  also  Blackstone's  Commentaries, 
Book  II,  Chap.  XXX;  and  Fowler's  History  of  Insurance,  p.  viii,  note, 
fin  this  connection  see  Martin's  History  of  Lloyds,  p.  27,  et  seq. 

144 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

individuals  than  to  business  undertakings,  such  as  are  typical 
of  our  insurance  companies  today.  The  early  Florentine  statute, 
for  illustration,  which  has  been  preserved*  and  in  which  there 
is  an  attempt  to  regulate  or  define  the  insurance  contract  by 
law,  is  not  necessarily  the  first  effort  in  this  direction,  but  it 
is  suggestive  that  at  the  beginning  of  the  fourteenth  century 
the  business  of  insurance  had  attained  to  sufficient  proportions 
to  attract  the  attention  of  government  and  lead  to  restrictive 
regulating  enactments,  more  or  less  of  an  interference  with  the 
freedom  of  contract  and  the  unrestrained  development  of  busi- 
ness enterprise. 

Chambers  op  Insurances. 

As  early  as  13 lo  there  was  a  Chamber  of  Insurances  es- 
tablished by  the  Count  of  Flanders,  at  Bruges  at  the  request 
of  the  merchants  of  that  city.  Chambers  of  insurances  were 
more  or  less  in  the  nature  of  societies  or  assemblies  of  mer- 
chants, traders,  bankers  and  others,  carrying  on  the  business 
of  insurance,  acting  under  conditional  government  authority,  or 
having  the  sanction  of  the  proper  authorities,  for,  as  observed  by 
Weskett,  since  undertakings  of  this  kind  "were  not  authorized 
by  the  King's  Letters  Patent,  they  had  but  little  credit  and 
their  policies  were  neither  many  nor  for  considerable  sums."  f 

Ordinances  op  Barcelona. 

In  the  year  1367  King  Ferdinand  of  Portugal  decreed  an 
ordinance  on  insurance,  which  takes  rank  as  one  of  the  very 
earliest  efforts  at  government  regulation,  followed  nearly  seventy 
years  later  by  the  enactment  of  the  five  famous  ordinances  of 
Barcelona,  passed  in  the  year  1435.  The  distinctive  feature 
of  these  and  numerous  subsequent  ordinances  is  the  under- 
lying principle  of  government  control  over  the  terms  and  uses 

♦The  marine  policy  established  by  the  Statute  of  Florence,  dated 
Jan.  28,  1523,  has  been  re-printed  in  full  in  a  Treatise  on  the  Law  of 
Insurance,  by  Geo.  Richards,  3rd  Ed.,  New  York,  1909,  p.  766. 

t  John  Weskett,  Theory,  Laws  and  Practice  of  Insurance,  London, 
1781,  p.  89. 

145 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

of  the  insurance  contract,  which  may  be  said  to  underlie  all 
modem  legislation,  except,  of  course,  that  the  principle  of 
public  control  has  been  enormously  extended,  co-incident  with 
the  corresponding  growth  of  the  business.  It  is  significant, 
however,  that  even  at  a  period  when  the  actual  extent  of  insur- 
ance transactions  must  have  been  quite  limited,  public  ordi- 
nances more  or  less  regulating  the  issue  of  insurance  contracts 
and  their  official  registration  for  authentication,  should  have 
been  found  necessary.  It  is  maintained  by  Reatz,  a  German 
writer  on  insurance,  that  the  Ordinance  of  King  Ferdinand 
of  Portugal  was  really  for  the  purpose  of  establishing  a  com- 
pulsory insurance  association  upon  the  principle  of  mutuality. 
All  of  these  early  efforts,  of  course,  have  reference  only  to  the 
business  of  marine  insurance,  since  life,  fire,  or  other  forms  of 
insurance  were  at  that  time  practically  unknown."  * 

Early  Records  of  Insurance  Transactions. 

The  business  of  individual  underwriting  was  at  this  time 
almost  exclusively  confined  to  the  seaport  towns,  which  accounts 
for  the  fact  that  insurance  or  cognate  subjects  are  usually  in- 
cluded within  the  provisions  of  the  ancient  codes  of  maritime 
commerce  or  the  sea  laws.  Such  inclusion,  of  course,  arises  out  of 
the  necessity  of  jettison  and  the  resulting  practice  of  contribu- 
tion out  of  which  the  principles  of  average  and  marine  insurance 
were  developed  in  the  course  of  time.  Although  the  business  of 
insurance  was  of  comparatively  limited  extent,  there  are  records 
to  prove  that  as  early  as  1370  there  were  numerous  insurance 
contracts  in  the  nature  of  individual  underwriting  in  force 
between  the  merchants  of  Genoa,  Italy,  and  Bruges,  in  the 
Netherlands,  while  there  is  a  record  of  1399  proving  that  during 
the  short  period  of  August  to  September  a  notary  of  Genoa 
certified  to  not  less  than  eighty  contracts  of  insurance.  At 
this  early  date  it  was  the  practice  in  marine  insurance  that  the 

*  For  an  admirable  and  learned  discussion  of  the  antiquity  of  insur- 
ance practice,  law  and  custom  see  Plass,  Geschichte  der  Assecuranz  und 
der  hanseatischen,  Seeversicherungs-BOrsen  Hamburg,  1902. 

146 


ORIGIN   AND   GROWTH   OP   LAW    AND   LEGISLATION 

premium  was  not  to  be  paid  until  the  voyage  was  completed, 
which  in  part  accounts  for  the  not  inconsiderable  amount  of 
litigation  and  the  apparent  necessity  of  government  interfer- 
ence upon  grounds  of  public  policy. 

The  Beginning  of  Government  Control  of  Insurance. 

These  references  to  the  antiquity  of  insurance  are  sufficient 
for  the  present  purpose,  to  emphasize  the  fact  that  govern- 
ment interest  in  insurance  transactions  has  been  practically 
co-incident  with  the  inception  of  insurance  and  that  the  prin- 
ciple itself  has  been  developed  and  perfected  with  the  develop- 
ment and  perfection  of  the  insurance  contract  to  its  present 
form.  Among  other  illustrations  of  the  more  or  less  drastic 
interference  of  government  in  matters  of  insurance,  reference 
may  be  made  to  an  edict  issued  by  Count  Philip  of  Burgundy, 
in  1458,  confirming  the  then  existing  law  of  insurance  and 
prohibiting  the  citizens  of  his  principality  to  act  contrary  in  all 
matters  of  insurance  to  the  judgment  and  arbitration  of  the 
law  of  Flanders.  Abuses  in  the  practice  of  insurance  were,  no 
doubt,  the  chief  cause  of  government  interference,  including, 
of  course,  the  frequent  disputes  between  the  contracting  parties 
under  the  then  extensively  prevailing  practice  of  individual 
underwriting,  which  brought  many  cases  into  court  for  settle- 
ment or  arbitration.  There  is  record  of  an  ordinance  of  Philip 
II  of  Spain,  then  the  oppressor  of  the  Netherlands,  dated  Octo- 
ber 31st,  1563,  which  calls  attention  to  the  great  practical 
value  of  insurance  as  an  aid  to  commerce,  but  which  also  makes 
reference  to  the  numerous  complaints  which  had  been  made 
against  abuses  in  insurance  matters  and  which  made  it  desirable 
that  thereafter  the  Exchange  of  Antwerp  should  adopt  a  stan- 
dard form  of  insurance  policy,  the  use  of  which  was  subsequently 
made  compulsory.  A  copy  has  been  kept  of  the  first  policy 
form  used  in  the  city  of  Hamburg,  which  shows  that  the  rules 
of  Antwerp  of  1563  were  adopted  by  other  European  commer- 
cial nations.     It  is,  therefore,  a  matter  of  indisputable  historic 

147 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

record  that  a  standard  policy  form  of  marine  insurance  was 
enacted  in  the  Netherlands  as  early  as  1563.* 

It  was  only  a  few  years  later,  in  1568,  when  the  notorious 
Duke  of  Alba,  as  Administrator  of  The  Netherlands,  issued 
an  ordinance  prohibiting  absolutely  all  marine  insurances  and 
declaring  all  contracts  of  this  character  null  and  void.  The 
great  loss  sustained  by  shipping  and  commerce  as  a  result  of 
this  act  brought  about  a  material  modification  of  the  decree 
in  1570  and  the  adoption  of  a  completely  revised  ordinance 
in  1 57 1,  which  again  made  the  practice  legal  and  much  the 
same  as  it  had  been  theretofore.  One  of  the  unforeseen  results 
of  the  prohibitory  ordinance  of  1568  was  the  transference  of 
the  seat  of  the  chief  center  of  individual  underwriting  from 
Bruges  to  Hamburg,  which  has  maintained  to  the  present  day, 
its  place  of  preeminence  in  this  respect  among  the  cities  of 
the  Continent  of   Europe. 

Insurance  as  a  Branch  of  Admiralty  Law. 

The  increasing  amount  of  insurance  litigation  brought  about 
the  necessity  of  special  consideration  and  in  the  free  city  of 
Hamburg  a  branch  of  the  Admiralty  was  established  as  a  Court 
of  First  Instance,  to  deal  with  cases  of  this  kind.  This  in- 
clusion of  insurance  contracts  as  within  the  scope  of  admiralty 
jurisdiction  is  an  extremely  interesting  and  suggestive  fact 
in  the  historical  development  of  insurance.  In  marked  contrast, 
the  English  practice  has,  on  the  whole,  been  adverse  to  the  recog- 
nition of  insurance  contracts  as  within  the  scope  of  admiralty 
jurisdiction,  since  they  were  contracts  made  on  land,  even  though 
for  the  exclusive  purpose  of  protecting  property  while  at  sea. 
The  Supreme  Court  of  the  United  States,  however,  in  the  case  of 
Insurance  Company  vs.  Dunham,  decided  in  1870,  laid  down 
the  important  principle  that  English  admiralty  practice  regard- 
ing insurance  contracts  could  not  be  accepted  and  that  the 
narrow  view  regarding  this,  as  well  as  other  admiralty  matters, 

♦  See  Martin's  History  of  Lloyds,  p.  27. 

148 


ORIGIN   AND   GROWTH   OP   LAW   AND   LEGISLATION 

could  not  be  accepted  by  the  Court  as  the  law  of  the  land.  It 
was  said  on  that  occasion,  and  the  remarks  have  a  broader 
meaning  than  is  at  first  apparent  on  superficial  reading,  that, 
"  This  Court  has  frequently  declared  and  decided  that  the 
admiralty  and  maritime  jurisdiction  of  the  United  States  is 
not  limited  either  by  the  restraining  statutes  or  the  judicial 
prohibitions  of  England,  but  is  to  be  interpreted  by  a  more 
enlarged  view  of  its  essential  nature  and  objects,  and  with  ref- 
erence to  analogous  jurisdictions  in  other  countries  constituting 
the  maritime  commercial  world,  as  well  as  to  that  of  England."* 
It  was,  therefore,  decided  by  the  Court  that  the  contract  of 
marine  insurance  was  a  maritime  contract  and  within  the 
scope  of  the  admiralty  jurisdiction  of  the  Court,  as  defined  in 
the  2d  Section,  ist  Clause  of  the  2d  Article  of  the  United  States 
Constitution. 

Colonial  Admiralty  Jurisdiction  Over  Insurance. 

The  importance  of  this  case  in  its  practical  bearing  upon 
the  future  interpretation  of  the  Commerce  Clause  of  the  Con- 
stitution in  its  possible  relation  to  insurance  cannot  easily  be 
over-estimated.  In  the  opinion  of  the  Court,  in  the  case  of 
Insurance  Company  vs.  Dunham,  as  delivered  by  Justice  Bradley, 
than  whom  no  member  of  the  Court  from  its  inception  has  had 
a  more  profound  knowledge  of  insurance  in  all  its  branches, 
there  is  a  comprehensive  review  of  the  laws  and  ordinances  of 
Barcelona  of  1435,  of  Venice  of  1468,  of  Florence  of  1523,  and 
of  Antwerp  of   1537;  ^^^  other  ancient   sea   laws   and  mari- 

*  Cases  on  the  Law  of  Admiralty,  by  Jas.  Barr  Ames,  Cambridge, 
1 90 1,  p.  47;  and  for  a  more  extended  discussion  see  "The  American 
Admiralty,  its  Jurisdiction  and  Practice,"  by  Erastus  C.  Benedict,  2nd 
Edition,  New  York,  1870,  Chapter  XIX,  on  the  Admiralty  and  Marine 
Jurisdiction  of  the  British  Colonies,  particularly  p.  83,  where  policies 
of  assurance  and  bottomry  loans  are  included  within  the  scope  of  the 
rights  and  privileges  contained  in  the  commission  of  the  Vice-Admiralty 
Judge  of  the  Provinces  and  Colonies  of  New  York,  Connecticut,  and 
East  and  West  Jersey,  dated  Oct.  15,  1762. 

149 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

time  codes,  which  do  not  require  to  be  enumerated.*  Upon 
this  basis  of  ancient  law  and  usage,  the  Court  arrived  at  the 
conclusion  that  "in  every  maritime  code  of  Europe,  unless 
England  is  excepted,  marine  insurance  constitutes  one  of  the 
principal  heads,"  and  further  that  it  is  a  fact  that  "the  com- 
missions in  admiralty  issued  to  our  colonial  governors  and  ad- 
miralty judges,  prior  to  the  Revolution,  which  may  be  fairly 
supposed  to  have  been  in  the  minds  of  the  Convention  which 
framed  the  Constitution,  contained  either  express  jurisdiction 
over  policies  of  insurance  or  such  general  jurisdiction  over 
maritime  contracts  as  to  embrace  them."t 

Lex  Mercatoria  Americana. 

The  marine  branch  of  insurance  is  no  longer  the  sole  or 
most  important  development  of  the  principle  of  insurance,  but 
other  forms  of  the  insurance  contract,  particularly  fire,  life  and 
accident,  have  assumed  proportions  wholly  unanticipated  when 
the  law  and  legislation  of  insurance  was  in  its  infancy.  Insur- 
ance, not  being  of  English  origin,!  i^  has  required  many  years 
to  perfect  both  the  common  and  the  statutory  law  which  to-day 
governs  and  controls  the  business.  Not  until  the  practice  of 
individual  underwriting  gave  place  to  the  assumption  of  insur- 
ance risks  by  chartered  corporations,  did  insurance  attain  to 
the  dignity  of  a  great  business,  entirely  separate  and  distinct 
from  other  branches  of  commercial  enterprise.  It  is  only  since 
insurance  corporations,  as  such,  have  come  into  existence  that 
the  quasi-public  character  of  the  insurance  function  has  become 
better  known  and  understood  by  law-making  and  governing 

*  For  extended  references  to  the  early  sea  laws  see  "A  Treatise  on 
Maritime  Law,"  by  Henry  Flanders,  Boston,  1852. 

tCases  on  the  Law  of  Admiralty,  by  J.  B.  Ames,  Cambridge,  1901,  p.  47. 

JThe  earliest  policy  extant  in  the  records  of  the  Admiralty  Court 
is  in  Italian  and  bears  the  date  of  1547.  The  earliest  policy  in  English 
bears  the  date  1555,  and  there  is  another  policy  of  1557  based  on  Italian 
forms  of  earlier  date  and  simpler  content  than  that  prescribed  in  the 
Florentine  Ordinance  of  1523.  See  Gow  on  Marine  Insurance,  4th  Ed., 
1909.  P-  322. 

150 


ORIGIN   AND   GROWTH    OF   LAW   AND   LEGISLATION 

bodies.  While  there  has  been  this  change  in  the  public  attitude 
toward  insurance  undertakings,  it  is  nevertheless  true  that 
in  most  of  the  insurance  transactions,  or  in  the  relations  of  the 
contracting  parties,  the  Law  Merchant*  still  governs  and  con- 
trols, except  in  so  far  as  the  common  law  has  established 
certain  fundamental  principles  and  as  statutory  law  has 
incorporated  these  principles  into  written  provisions  for 
the  more  safe  and  equitable  conduct  of  the  business. 
In  England  a  Court  of  Assurances  had  been  estab- 
lished as  early  as  1601  and  it  is  recited  in  the  Act  of  that 
year  that  policies  of  insurance  were  contracts  of  great  value 
in  promoting  commercial  adventure  and,  therefore,  entitled 
to  the  solicitude  and  protection  of  the  government.  The  Court 
of  Assurances  fell  later  into  this  use,  but  the  principle  of  public 
supervision  over  these  transactions  had  been  clearly  recognized 
and  was  never  subsequently  lost  sight  of  in  English  law  and 
legislation,  t 

*  The  most  important  American  work  on  the  Law  Merchant  is  "An 
Enquiry  into  the  Law  Merchant  of  the  U.  S.,  or  Lex  Mercatoria  Amer- 
icana," by  Geo.  Gaines,  N.  Y.,  1802.     (Vol.  I  only  was  printed.) 

t  In  a  letter  to  the  Post  Magazine  and  Insurance  Monitor  of  London, 
July  25,  1908,  the  following  letter  is  re-printed  from  the  Acts  of  the 
Privy  Council,  1579,  according  to  which  22  years  before  the  Act  of  1601 
was  passed  the  Privy  Council  took  official  cognizance  of  insurance  dis- 
putes and  concerned  itself  with  matters  of  investigation  and  adjudgment 
similar  to  the  functions  subsequently  discharged  by  the  Court.  The 
letter  reads  in  full  as  follows: 

[Extract.] 
9"  Januarij,  1579,  Whitehall. 

Present: — Lord  Chancellor,  Lord  Admiral,  Lord  Chamberlain,  Lord 
Hunsdon,  Mr.  Comptroller,  Mr.  Vicechamberlain,  Mr.  Secretary  Walsing- 
ham,  Mr.  Secretary  Wilson. 


A  letter  to  William  Mericke,  Richard  May,  Thomas  Branly  and  the 
reste  of  the  Commissioners  appointed  for  matters  of  Assurances  within 
the  Cittie  of  London  that  whereby  a  letter  from  some  of  their  Lordships 
of  the  24th  of  May,  1578,  they  recommended  unto  them  a  complaint 
exhibited  unto  them  by  Hippolito   Beamonti,  a  merchant  of  Luca  in 

151 


origin  and  growth  op  law  and  legislation 

Early  English  Insurance  Law. 

The  earliest  restrictive  English  legislation,  on  the  subject 
of  insurance  except  as  otherwise  referred  to  elsewhere,  appears 
to  have  been  19  George  II,  c.  37  (1746).*  which  has  refer- 
ence to  bottomry  bonds,  but  which  included  a  provision  "that 
all  insurances,  interest  or  no  interest,  or  without  farther  proof 
of  insurance  than  the  policy  itself,  by  way  of  gaming  or  wagering, 
or  without  benefit  of  salvage  to  the  insurer  (all  of  which  had 
the  same  pernicious  tendency),  shall  be  totally  null  and  void, 
except  upon  privateers  or  upon  ships  or  merchandise  from 
the  Spanish  or  Portuguese  Dominions,  for  reasons  sufficiently 
obvious,"  etc.t 

This  Act  was  followed  in  1774  by  the  so-called  Gambling 
Act,  or  14  George  III,  c.  48,  which  provided  that  **no  insurance 
shall  be  made  on  lives  or  on  any  other  event  wherein  the  party 
insured  had  no  interest;  that  in  all  policies  the  name  of  such 

Italye,  concerning  a  controversie  betwene  him  and  the  assurers  of  Lon- 
don, which  Hippolito  had  caused  to  be  assured  by  two  severall  polUcies 
certen  woade  from  Burdeaux  to  Roan  and  Newhaven,  which  woade, 
after  the  assurance  made,  was  taken  by  the  Vlissingers  and  confiscates 
(sic),  whereupon  the  said  Hippolito  by  means  of  their  Lordships'  said 
letters  unto  them  obtayned  from  the  said  assurers  the  money  by  them 
assured;  forasmuche  as  their  Lordships  by  the  peticion  inclosed  are 
geven  to  understand  that  by  good  proofes  it  is  since  evidentlie  discovered 
that  the  said  woade  hathe  ben  againe  recovered  with  the  privitie  of  the 
said  Hippolito  from  the  Flushingers  by  the  two  merchauntes  in  who[se] 
names  the  same  was  assured,  their  Lordships  therfore  desirous  to  under- 
stand the  veritie  thereof,  to  th'ende  that  aswell  restitucion  maie  be 
made  unto  th'assurers  of  the  money  by  them  without  cause  payed  unto 
him,  as  that  the  lewde  acte  of  the  practiser  maie  not  remayne  unpunished, 
doe  require  them  by  vertue  hereof  to  call  fourthwith  before  them  the 
said  assurers  and  Hippolito,  and  after  they  shall  have  substancially 
examined  the  matter  to  certifie  imto  their  Lordships  what  they  finde 
thereof,  that  thereupon  suche  order  maye  be  taken  as  shalbe  aggreable 
with  justice  and  equitie. 

♦  Reprinted  in  full  in  Cases  on  Insurance,  by  Eugene  Wambaugh, 
Cambridge,  1 901,  p.  6. 

t  Blackstone's  Commentaries,  Book  II,  Chapter  XXX .  (4th  Ed., 
Vol.  I,  p.  796.) 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

interested  party  should  be  inserted,  and  nothing  more  shall  be  re- 
covered thereon  than  the  amount  of  the  interest  of  the  insured." 

The  Common  Law  op  Insurance. 

The  legal  principles  expressed  in  these  two  Acts  have  re- 
mained the  law  of  England  to  the  present  day,  the  first  govern- 
ing the  marine  and  other  property  insurance  contracts,  while  the 
second  governs  contracts  involving  life  contingencies.*  The 
Commentaries  of  Blackstone  upon  these  Acts  contain  the  sug- 
gestive statement  that,  "the  learning  relating  to  these  insur- 
ances hath  of  late  years  been  greatly  improved  by  a  series 
of  judicial  decisions;  which  have  now  established  the  law  in 
such  a  variety  of  cases  that  (if  well  and  judicially  col- 
lected) they  would  form  a  very  complete  title  in  a  code  of 
commercial  jurisprudence;  but,  being  founded  on  equitable 
principles  which  chiefly  result  from  the  special  circumstances 
of  the  case,  it  is  not  easy  to  reduce  them  to  any  general  heads 
in  mere  elementary  institutes.  Thus  much,  however,  may  be 
said;  that  being  contracts,  the  very  essence  of  which  consists 
in  observing  the  purest  good  faith  and  integrity,  they  are  vacated 
by  any  the  least  shadow  of  fraud  or  undue  concealment;  and, 
on  the  other  hand,  being  much  for  the  benefit  and  extension 
of  trade  by  distributing  the  loss  or  gain  among  a  number  of 
adventurers,  they  are  greatly  encouraged  and  protected  both 
by  common  law  and  Acts  of  Parliament,  "f 

Smuggling  and  Contrabrand  Trade. 

Mention  should  be  made  in  this  connection,  however,  of 
an  Act  passed  in  1693,  when  by  the  4th  and  5th  William  and 
Mary,  it  was  provided  that  ''All  persons  who  shall  undertake 
by  way  of  insurance  or  otherwise,  to  deliver  any  goods,  etc., 

*  It  requires  to  be  stated  in  this  connection  that  the  English  law- 
relating  to  insurance  was  codified  into  the  marine  insurance  Act  of 
1906  (6th  Ed.,  VII,  Chap.  41),  but  in  addition  thereto  a  new  marine 
insurance  gambling  act  was  enacted  by  Parliament  in  1909. 

t  Blackstone's  Commentaries,  4th  Ed.,  Vol.  I,  p.  796. 

153 


ORIGIN   AND   GROWTH   OP  LAW   AND   LEGISLATION 

without  paying  the  duties  or  customs,  or  any  prohibited  goods 
whatever,"  shall  forfeit  the  sum  of  .-^500  and  that  a  like  sum 
shall  be  forfeited  by  the  insured.  This,  so  far  as  known,  is  the 
first  prohibitory  statute  regulating  in  part  insurance  transactions 
in  England,  enacted,  of  course,  before  insurance  corporations 
came  into  existence  and  when  the  business  was  exclusively 
carried  on  by  individual  underwriters.  The  object  of  the  Act 
of  1693  was  to  place  a  severe  penalty  on  all  insurance  of  con- 
traband trade,  particularly  smuggling,  regarding  which  it  has 
been  pointed  out  by  Millar  in  his  treatise  on  The  Law  of  Insur- 
ances (Edinburgh,  1787)  that  **  Every  person  who  insures 
contraband  goods  is  assisting  and  abetting  in  an  evasion  of  the 
law.  Nay,  as  the  insurer  takes  the  risk  of  capture  and  seizure 
upon  himself,  it  is  he,  properly  speaking,  who  is  to  be  considered 
as  the  smuggler.  Every  insurance  upon  a  trade  which  the 
parties  know  to  be  illicit,  must,  therefore,  be  illegal." 

First  Taxes  Upon  Insurance  Policies, 

Only  two  years  before  this  Act  was  passed  the  first  regular 
office  for  insurance  against  loss  by  fire  had  been  established  in 
London  by  a  group  of  individual  underwriters,  but  as  early 
as  1694  a  high  stamp  duty  was  imposed  on  fire  policies,*  which 
would  indicate  that  fire  insurance  at  this  time  was  not  held 
in  any  particularly  high  regard  by  the  government. f 

Early  English  Fire  Insurance  Companies. 

Fire  insurance  in  England  did  not  come  into  extended  use 
until  subsequent  to  the  great  fire  of  London,  which  occurred 
in  1666.  Various  early  schemes  for  fire  insurance  institutions 
were  inaugurated  during  the  next  thirty  years  subsequent  to 
this  date,  but  none  assumed  considerable  proportions  or  attained 
to  permanency,  except  in  so  far  that  earlier  ideas  were  incor- 

*  Report  on  Fire  Insurance  Duties,  Pari.   Paper,  London,   1857. 

t  In  1698  and  during  subsequent  years  the  duties  were  further  in- 
creased. See  table  of  data  and  list  of  statutes  with  account  of  revenue, 
etc.,  in  Report  of  1857,  opp.  p.  9. 

154 


ORIGIN   AND   GROWTH   OP   LAW   AND   LEGISLATION 

porated  into  latter  day  institutions.  A  fire  office,  conceived  by 
Dr.  Barbon,  the  first  successful  projector  of  fire  insurance  in 
England,  was  established  in  1667  and  in  1686  this  concern 
solicited  from  the  Lords  of  the  Privy  Council  a  patent  for  the 
exclusive  privilege  of  making  and  registering  all  assurance 
policies  and  contracts  on  houses  from  fire  within  the  bills  of 
mortality  for  thirty-one  years,  having  insured  for  so  long  a 
time.  This  desire  for  parliamentary  sanction  of  what  would 
be  equivalent  to  a  monopoly  indicates  also  the  early  necessity 
for  government  protection  on  the  part  of  those  actively  engaged 
in  the  management  of  institutions  of  this  kind.  In  1696,  how- 
ever, a  society  came  into  existence  with  the  title  "Contributors 
for  Insuring  Houses,  Chambers,  or  Rooms  from  Loss  by  Fire, 
with  Amicable  Contributions  within  the  Cities  of  London  and 
Westminster  and  the  Liberties  Thereof  and  the  Places  There- 
unto Adjoining."  This  title  was  subsequently  altered  to 
"Amicable  Contributors  for  Insuring  Loss  by  Fire,"  and  subse- 
quently to  "Amicable  Contributionship,"  and  finally,  in  1706, 
to  the  name  of  "Hand  in  Hand."  The  very  title  is  evidence 
of  the  fact  that  the  undertaking  was  a  mutual  agreement  of  joint 
contributors,  primarily  for  the  individual  protection  of  the  sub- 
scribers and  incidentally  for  profit.  Similar  undertakings  came 
into  existence  with  the  establishment  in  17 10,  of  the  Sun  Fire 
in  1 7 14,  the  Union;  and  in  17 17  the  Westminster,  but  these 
were  mere  joint  partnerships,  and  not  essentially  different  from 
other  trading  concerns.* 

*  The  following  extremely  interesting  advertisement  having  reference 
to  an  insurance  project  which,  in  all  probability,  led  to  the  granting 
of  the  charter  of  the  Royal  Exchange  in  1720,  was  printed  in  the  Post 
Magazine  and  Insurance  Monitor  of  London,  under  date  of  June  4,  1910. 

From  "  The  Post  Boy."     Numb.  4392.     From  Thursday  Sept. 
19,  to  Saturday  Sept  21,  171 7. 

The  SUBSCRIPTION  at  MERCERS-HALL  in  CHEAPSIDES  for  raising 
a  FUND  of  ONE  or  TWO  MILLIONS  Sterling,  in  order  to  incorporate 
a  Company  for  Insurance  of  Ships,  Merchandise,  &c.,  was  open'd  the 
12th  of  August  last;  begun  by  an  Eminent  Merchant  of  this  City,  and 

155 


ORIGIN   AND  GROWTH   OP   LAW   AND   LEGISLATION 

In  17 1 1  a  proposal  had  been  made  for  a  national  insur- 
ance office,  by  a  petition  of  record  to  the  House  of  Com- 
mons, **For  raising  great  sums  of  money  all  over  Great  Britain, 
for  the  use  of  the  Government,  to  the  benefit  and  security  of 
all  those  that  are  anyways  concerned,"  for  the  purpose  of 
eliminating  private  enterprise  in  fire  insurance,  it  being  held 
that  "the  public  good  of  the  nation  ought  at  all  times  to  be 
preferred  before  the  private  interest  of  all  societies."* 

Royal  Exchange  and  London  Assurance. 

The  scheme  for  national  insurance  was  not  carried  through, 
but  the  era  of  so-called  "bubble  companies,"  emphasizing  the 
necessity  of  more  secure  and  permanent  insurance  institutions, 
accounts  for  the  passage  of  the  Bubble  Act,  6  George  I  c.  18, 
passed  in  June,  1720,  which  empowered  the  King  to  grant  two 
charters  to  proposed  insurance  corporations,  as  the  result  of 
which  the  Royal  Exchange  Assurance  and  the  London  Assur- 
ance came  into  existence  that  year.f    While  the  object  of  these 

subscribed  by  several  others:  But  being  desired  to  be  shut  till  some  Altera- 
tions were  made  therein,  and  till  several  who  intend  to  subscribe  largely 
thereto  can  com,e  to  Town,  to  subscribe  for  themselves.  Notice  is  hereby 
given,  That  pursuant  to  the  Desire  of  several  considerable  Merchants  and 
others,  the  following  Alterations  are  made,  by  and  with  the  consent  of  those 
who  have  already  subscribed,  viz.  Whereas  the  subscription  was  at  first 
limited  to  su^h  as  are  Natives  or  Naturalized ;  it  is  agreed  to  admit  any 
that  are  His  Majesty's  Subjects,  Men  of  Substance  and  Reputation :  And 
instead  of  One  per  Cent,  no  Subscriber  is  to  pay  more  than  Half  per  cent. 
towards  defraying  the  Charges  of  forming  the  Company,  and  obtaining  a 
Charter.  N.B.  The  Subscription  will  be  open'd  again  on  Wednesday  next 
at  Eight  in  the  Morning.  No  Subscriber  is  oblig'd  to  pay  the  Half  per  Cent. 
nor  one  Penny  on  any  Account  whatever,  till  the  Managers  &c.  are  chosen; 
nor  then,  if  he  do  not  like  the  Company,  Abstracts  of  the  Articles  are  de- 
livered (Gratis)  to  those  that  come  or  send  for  them  to  the  Hall. 

*  History  of  Fire  Insurance  Companies,  by  F.  B.  Relton,  p.  93.  See 
also  Walford  Insurance  Cyclopedia,  Vol.  Ill,  p.  438  et  seq. 

t  For  a  full  account  of  the  origin,  powers  and  privileges  of  the  Royal 
Exchange  and  London  Assurance,  see  Lex  Mercatoria  Rediviva,  by 
Wyndham  Beawes,  London,  1752,  p.  262  et  seq.  Also,  John  Weskett, 
Theory,  Laws  and  Practice  of  Insurance,  London,  1781,  p.  108  et  seq, 

IS6 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

two  institutions  was  primarily,  and  apparently  exclusively,  the 
making  of  marine  insurances,  their  activity  later  included  other 
branches  of  the  business.  The  charters  granted  an  exclusive 
monopoly,  without,  however,  interfering  with  the  practice  of 
individual  underwriting.  The  charters  were  revocable  at  the 
expiration  of  thirty-one  years  and  it  was  provided  that  "All 
other  corporations  and  all  partnerships  for  assuring  ships  or 
merchandise  at  sea  or  for  lending  money  upon  bottomry  should 
be  restrained  from  underwriting  any  policies  or  making  any 
contracts  of  assurance  on  ships  or  merchandise  at  sea,"  etc., 
but,  "nevertheless  any  particular  person  shall  be  at  liberty 
to  underwrite  policies,  or  may  lend  money  by  way  of  bottomry, 
so  as  the  same  be  not  upon  the  account  or  risk  of  a  corporation 
or  of  persons  acting  in  partnership."* 

By  an  Act  passed  in  the  year  1725,  "All  promissory  notes 
for  assurance  on  ships  or  merchandise  in  either  company  were 
declared  null  and  void."  A  revised  set  of  proposals  had  been 
issued  by  the  Royal  Exchange  in  1722,  according  to  which  the 
corporation  was  then  authorized  to  assume  fire  risks,  it  being 
stated  that  "His  Most  Gracious  Majesty,  being  desirous  to 
promote  and  encourage  such  lawful  and  commendable  under- 
takings as  are  calculated  for  the  security  of  all  his  loving  sub- 
jects, has  granted  to  this  Corporation  his  Royal  Charter  for 
those  ends  and  purposes,  by  virtue  whereof  they  now  assure 
houses,  buildings,  goods,  wares  and  merchandises,  from  loss 
and  damage  by  fire,  throughout  the  Kingdom  of  England,  and 
Town  of  Berwick-upon-Tweed,  the  Kingdom  of  Ireland,  and  all 
other  parts  of  His  Majesty's  dominions  beyond  the  seas,  upon 
the  following  easy  terms,"  etc.f 

English  Insurance  Law  in  the  American  Colonies. 

The  foregoing  sentence  proves  clearly  that  the  objects  of 
the  Royal  Charter  were  to  establish  a  national  institution  with 

*  Fowler,  History  of  Insurance,  p.  9. 

t  An  Account  of  Fire  Insurance   companies,  compiled  by  Francis  B. 
Relton,  London,  1893,  p.  160. 

157 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

power  to  transact  business  throughout  the  British  dominions 
including,  of  course,  the  American  colonies,  but  it  is  very  curious 
that  Scotland  was  not  mentioned  as  coming  within  the  field  of 
the  corporations'  operations.  Relton  in  this  connection  observes 
that  "Respecting  the  undertaking  insurances  in  all  parts  of  His 
Majesty's  dominions  beyond  the  seas,  it  is  not  impossible  that 
the  projectors  of  the  Royal  Exchange  Corporation,  who  were 
connected  with  marine  insurance,  were  aware  of  the  fact  that 
Lloyds  undertook  such  fire  business  (presuming  that  they  did 
so),  and  so  made  it  a  feature  in  their  proposals  in  order  to 
compete  with  Lloyds  in  fire  as  well  as  in  marine  insurance." 
Historical  evidence  is  not  wanting  to  prove  that  a  considerable 
amount  of  marine  insurance  was  transacted  in  the  Colonies  by 
the  mother  country,  for  in  a  letter  written  to  William  Penn  by 
a  Mr.  James  Logan,  the  Secretary  of  the  Province  of  London, 
dated  January  2nd,  i7o6-'o7,  the  conscientious  scruples  of  the 
Quaker  against  insurance  are  answered  in  the  statement  that 
"I  beseech  thee  not  to  be  scrupulous  in  insuring,  for  if  I  have 
any  right  notion  of  the  matter  'tis  as  just  and  lawful  as  any 
other  part  of  trade.''  The  considerable  extent  of  piracy  on  the 
American  coast  made  insurance  at  this  time  an  absolute  neces- 
sity and  without  such  insurance  a  large  part  of  colonial  trade 
would,  unquestionably,  have  come  to  an  end. 

First  *  Public  Insurance  Office  '  in  America. 

The  historical  connection  of  what  has  just  been.related  with 
subsequent  events  in  America  is  not,  of  course,  to  be  substan- 
tiated by  an  unbroken  chain  of  documentary  evidence.  There, 
however,  can  be  no  doubt  but  that  the  development  of  the 
insurance  business  in  the  Colonies  followed  largely  and  in  many 
instances  almost  literally  the  preceding  development  of  insur- 
ance institutions  in  England.  Co-incident  therewith,  of  course, 
was  the  development  of  insurance  law  and  the  relationship  of 
government  to  insurance  institutions.  The  earliest  authentic 
account  of  "a  public  insurance  office"  in  America  is  found  in 
an  item  of  the  American  Weekly  Mercury  of  May  25th,  17  21, 

158 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

in  which  Mr.  John  Copson,  of  High  Street,  offers  his  services 
as  an  insurance  broker  to  the  merchants  of  the  city  "and  other 
parts."    According  to  Fowler,  the  advertisement  read  as  follows: 

"Assurances  from  Losses  happening  at  Sea,  &c.,  being 
found  to  be  very  much  for  the  Ease  and  Benefit  of  the  Merchants 
and  Traders  in  general ;  and  whereas  the  Merchants  of  this  City 
of  Philadelphia  and  other  Parts  have  been  obliged  to  send  to 
London  for  such  Assurance,  which  has  not  only  been  tedious 
and  troublesome,  but  even  very  precarious.  For  remedying 
of  which.  An  Office  of  Publick  Insurance  on  Vessels,  Goods  and 
Merchandizes,  will,  on  Monday  next,  be  Opened,  and  Books 
kept  by  John  Copson,  of  this  city,  at  his  House  in  the  High 
Street,  where  all  Persons  willing  to  be  Insured  may  apply: 
And  Care  shall  be  taken  by  the  said  J.  Copson  That  the  Assurers 
or  Under  Writers  be  Persons  of  undoubted  Worth  and  Repu- 
tation, and  of  considerable  Interest  in  this  City  and  Province."* 

We  have  here  conclusive  proof  that  the  early  insurance 
transactions  in  the  Colonies  had  been  carried  on  in  London,  but 
that  it  was  now  proposed,  since  sufficient  security  could  be 
furnished,  to  afford  an  opportunity  for  taking  out  insurances 
in  the  principal  seaport  towns  of  the  Colonies. 

A  Plea  for  Government  Insurance. 

'  Influenced,  however,  in  all  probabiHty,  by  the  proposal 
for  a  national  insurance  office,  made  in  171 1,  the  earliest  of 
American  political  economists,  Francis  Rawle,  proposed  the 
establishment  of  a  semi-governmental  insurance  institution  in 
1725.     The  proposition,  in  part,  reads  that 

"  Having  thus  far  discours'd  of  most  of  the  Branches  of 
Trade  we  are  capable  of,  there  is  yet  one  great  Encouragement, 
to  adventure  in  the  Discovery  and  Prosecution  of  new  Markets ; 
more  safe  to  the  industrious  Adventurer ;  namely  an  Insurance- 
Office  in  one  or  more  of  these  Colonies ;  which  is  the  interesting 
of  divers  in  the  Loss  or  Profit  of  a  Voyage,  and  is  now  become 
so  much  the  Practice  of  England,  that  Insurance  may  be  had  in 
divers  Cases  as  well  against  the  Hazards  at  Land,  as  Casualties 
at  Sea,  which  must  be  acknowledged  not  only  to  be  safe,  but  a 

♦Fowler,  History  of  Insurance,  p.  11. 

159 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

great  Encouragement  to  Adventure ;  for  it  may  so  happen  that 
a  Person  may  sometimes  adventure  his  ALL,  and  then  in  case 
of  a  Loss  he  may  be  rendered  uncapable  of  a  future  Trade, 
to  the  Disadvantage  of  the  Publick,  and  (it  may  be)  to  the  Ruin 
of  himself;  whereas  could  he  get  a  part  of  his  Interest  either 
of  Ship  or  Cargo  insured,  (tho'  in  Case  of  safe  Arrival  he  parts 
with  a  part  of  his  Profit,  yet,  in  case  of  loss,  he  is  secur'd  of 
such  part  as  he  insureth,  which  may  be  sufficient  Bottom  to 
begin  a  new  Adventure :  How  far  this  may  conduce  to  the  Trade 
of  this  River,  is  obvious  to  any  Man  of  Thought.  Now  whereas 
there  has  been  some  Attempts  made  at  Philadelphia,  which 
dropt  and  prov'd  abortive,  (for  what  Reasons  we  never  could 
learn)  we  humbly  propose  to  the  Legislature  that  an  Office 
be  erected  and  supported  by  a  Fund  arising  out  of  the  Interest 
of  the  Loan-Office.  This  will  be  a  good  and  safe  Bottom,  and 
cannot  be  easily  overset  by  a  few  losses;  and  we  conceive  will 
contribute  to  keep  up  the  Value  of  our  Paper-Credit  by  pro- 
moting of  Trade,  Navigation  and  Building  of  Ships,  and  in  Con- 
sequence, of  great  Advantage  to  this  River:  Which  we  prefer 
to  the  Consideration  of  the  Merchant."  * 

Aside  from  other  reasons,  this  proposal  could  not  have  been 
carried  into  effect,  since  it  would  have  come  in  conflict  with 
the  monopoly  granted  to  the  Royal  Exchange  and  London 
Assurance  Corporations.  Rawle  probably  was  not  aware  of  the 
Statute  of  6th  George  I,  c.  i8,  but  in  any  event  no  action  was 
taken  in  the  matter.  The  proposal,  however,  is  a  most  interest- 
ing one  and  particularly  so  in  view  of  the  fact  that  Rawle  held 
insurance  to  be  a  branch  of  trade,  in  full  conformity  to  other 
writers  on  the  subject  of  that  early  period. 

First  Mention  op  "America"  in  an  English  Insurance 

Statute. 

Following  the  establishment  of  an  insurance  office  by  John 
Copson  in  1721,  the  next  office  in  Philadelphia  of  which  there 
is  record  was  established  by  Joseph  Saunders,  in  1750;  followed 
by  Thomas  Wharton,  in  1752;  and  by  Walter  Shee,  in  1756. 
The  small  number  of  separate  offices  is  not  an  indication,  how- 

*Ways  and  Means  for  the  Inhabitants  of  Delaware  to  become  Rich, 
Fowler,  History  of  Insurance,  pp.  62—63. 

160 


ORIGIN   AND   GROWTH    OF   LAW   AND   LEGISLATION 

ever,  of  the  amount  of  business  transacted,  since  offices  of  this 
kind  were  merely  for  the  purpose  of  facilitating  intercourse 
between  insurers  and  insuring  merchants.  The  law  governing 
these  transactions  in  the  American  Colonies  was,  of  course,  the 
law  of  England,  including  the  statute  of  1746,  regulating  insur- 
ance on  ships  belonging  to  Great  Britain  and  on  merchandise  or 
effects  laden  thereon.    The  preamble  to  this  Act  sets  forth  that, 

"  The  making  Assurances  Interest  or  no  Interest,  or  without 
further  proof  of  Interest  than  the  Policy,  hath  been  productive 
of  many  pernicious  Practices,  whereby  great  Numbers  of  Ships, 
with  their  Cargoes,  have  either  been  fraudulently  lost  and 
destroyed,  or  taken  by  the  Enemy  in  time  of  War;  and  such 
Assurances  have  encouraged  the  Exportation  of  Wool,  and 
the  carrying  on  many  prohibited  and  clandestine  Trades,  which, 
by  Means  of  such  Assurance,  have  been  concealed,  and  the 
Parties  concerned  secured  from  Loss,  as  well  to  the  Diminution 
of  the  publick  Revenue,  as  to  the  great  detriment  of  fair 
Traders;  and,  by  introducing  a  mischievious  kind  of  Gaming 
or  Wagering  under  the  Pretence  of  assuring  the  Risque  on 
Shipping  and  fair  Trade,  the  Institution  and  laudable  Design 
of  making  Assurances  hath  been  perverted;  and  that  which 
was  intended  for  the  Encouragement  of  Trade  and  Navigation 
has,  in  many  Instances  become  hurtful  of,  and  destructive  to, 
the  same:     For  Remedy  whereof  it  is  enacted, 

That,  from  and  after  the  first  Day  of  August,  1746,  no 
Assurance  or  Assurances  shall  be  made,  by  any  Person  or 
Persons,  Bodies  Corporate  or  Politick,  on  any  Ship  or  Ships, 
belonging  to  His  Majesty  or  any  of  his  Subjects,  or  on  any  Goods, 
Merchandise  or  Effects,  laden  or  to  be  laden,  on  board  of  such 
Ship  or  Ships,  Interest  or  no  Interest,  or  without  further  proof 
of  Interest  than  the  policy,  or  by  way  of  Gaming  or  Wagering, 
or  without  Benefit  of  Salvage  to  the  Assurer,  and  that  every  such 
Assurance  shall  be  null  and  void  to  all  Intents  and  Purposes,"  etc. 

The  Act  further  provided  that  the  same  should  "not  ex- 
tend to,  or  be  in  force  against,  any  persons  residing  in  any  parts 
of  Europe  out  of  His  Majesty's  dominions,  for  whose  account 
assurance  shall  be  made  before  the  29th  of  September,  1746; 
nor  against  persons  residing  in  any  parts  of  Turkey,  Asia,  Africa, 
or  America,  from  whom  assurances  shall  be  made  before  the 

.161 


ORIGIN   AND   GROWTH   OP   LAW   AND   LEGISLATION 

29th  of  March,  1747."*  This  is  probably  the  first  mention  of 
the  word  'America'  in  an  insurance  statute  and  by  inference  the 
reference  proves  that  insurance  transactions  between  the  mother 
country  and  the  Colonies  at  that  time  were  of  sufficient  con- 
sequence to  require  special  consideration. 

Early  Prohibitive  Insurance  Statutes. 

Prohibitory  or  regulative  statutes  of  insurance  were  neither 
new  nor  novel  at  the  time  when  the  Act  of  1754  was  passed. 
The  Civic  statutes  of  Genoa  (1588),  according  to  Fowler,  pre- 
scribed penalties  for  securities,  bonds  or  wagers  made  upon  the 
life  of  the  Pope,  or  upon  the  life  of  the  Emperor,  or  any  consti- 
tuted dignitary,  ecclesiastical  or  secular,  without  license  of  the 
Senate.  The  24th  Article  of  the  Ordinance  of  Amsterdam  of 
1598  expressly  prohibited  insurance  on  the  life  of  any  person 
and  even  earlier  than  this  there  is  record  of  a  similar  prohibi- 
tion in  a  French  maritime  treatise  entitled  Le  Guidon,  accord- 
ing to  which  (Sec.  5)  "Another  kind  of  insurance  is  made  in 
other  nations,  it  is  upon  the  lives  of  men;  by  which  in  case  of 
their  dying  during  a  voyage  certain  sums  are  to  be  paid  to 
their  heirs  or  creditors.  Creditors  may  even  insure  their  debts 
if  their  debtors  remove  from  one  country  to  another;  the  same 
can  be  done  by  those  having  rents  or  pensions,  so  that  in  case 
of  their  decease  there  will  be  continued  to  their  heirs  such 
pension  or  rent.  These  are  all  forbidden  as  against  good  morals, 
being  customs  from  which  endless  abuses  and  deceptions  arose."  f 
In  this  connection  Fowler  observes  that  "Legal  regulations  as 
following  and  developed  by  the  insurance  practices  had  shown 
themselves  in  a  decree  of  1369  of  the  Duke  of  Genoa  in  an 
ordinance  promulgated  by  the  magistrates  of  Barcelona  in  1435, 
and  in  a  law  of  Flanders  of  1537."  Regulations  of  the  insurance 
of  Antwerp  and  Amsterdam  followed  later  in  the  i6th  Century. 
The  famous  **Ordonnance  de  la  Marine"  enacted  in  France  in 


*  Postlethwayt,    Universal  Dictionary  of  Trade  and  Commerce,  Lon- 
don, 1751,  Vol.  I.  p.  146: 

t  Fowler,  History  of  Insurance,  p.  vii. 

162 


ORIGIN    AND   GROWTH    OF   LAW   AND   LEGISLATION 

1681  provided  by  Art.  10,  that  "We  forbid  the  making  of  any 
insurance  upon  the  life  of  men,"  but  an  exception  was  made 
by  Art.  11,  for  the  insurance  of  persons  against  the  risk  of 
captivity,  to  provide  the  required  amount  of  ransom.  The 
prohibition  of  life  insurance  in  France  naturally  prevented  the 
development  of  this  branch  of  insurance  in  that  country  and 
the  practice  was  not  introduced,  according  to  Bunyon,  until 
the  latter  part  of  the  i8th  Century.  John  Millar,  an  advocate 
of  Edinburgh,  in  his  treatise  on  the  elements  of  the  law  relating 
to  insurance,  published  in  1787,  observes  in  this  connection  that 
"many  of  the  foreign  mercantile  states  prohibit  insurance  on  lives, 
a  prohibition  arising  from  the  jealousy  naturally  entertained  in 
an  ill-regulated  government,  of  whatever  may  serve  as  a  motive 
to  the  commission  of  great  crimes.  The  same  jealousy  is  yet 
more  apparent  in  some  of  the  Italian  States,  where  insurance  is 
not  only  prohibited  on  the  lives  of  great  men,  but  on  any  politi- 
cal occurrence,  and  even  on  marriages  and  the  birth  of  children."* 

Wagering  Contracts  in  English  Law. 

This  observation  by  a  trained  legal  mind  near  the  close 
of  the  1 8th  Century  illustrates  the  viewpoint  held  with  reference 
to  the  nature  of  wagering  policies  and  the  important  element  of 
insurance  interest.  While  England  was  apparently  the  first  coun- 
try to  prohibit  insurances  without  interest,  practices  nevertheless 
have  been  permitted  which  have  been  prohibited  in  practically 
all  other  civilized  countries.  The  English  in  this  respect  make 
a  distinction,  more  or  less  clearly  defined,  between  insurance 
wagers  not  contrary  to  public  policy  but  conducive  to  the 
development  of  trade  and  insurance  practices  clearly  contrary 
to  the  public  good  and  incompatible  with  high  standards  of 
private  and  public  morality.  This  explains  why  the  immense 
amount  of  wagering  transactions  carried  on  at  Lloyds  upon 
the  life  of  the  King  and  a  thousand  and  one  other  contingen- 
cies are  permissible  in  England,  while  not  permitted  or  con- 
doned in  other  civilized  countries. 

♦Law  Relating  to  Insurances,  by  John  Millar,  Edinburg,  1787,  p.  a6. 

163 


origin  and  growth  of  law  and  legislation 

The  Doctrine  op  Insurable  Interest. 
Prohibitory  or  regulative  statutes  governing  the  business 
of  insurance  in  England  have  been  very  few  and  far  between. 
The  two  statutes  of  1746  and  1774  have  practically  governed 
the  essentials  of  the  business  even  to  the  present  day.  Even 
these  Acts  were  not  statutory  declarations  of  new  principles 
of  law,  but  rather  the  precise  enunciation  of  long-established 
principles  of  the  common  law.  The  principle  of  insurable  interest 
had  been  laid  down  certainly  as  early  as  1692  in  the  Chancery 
Courts  case  of  Goddard  vs.  Garrett,  wherein  it  was  stated  that 
the  Court  "took  it  that  the  law  is  settled  that  if  a  man  has 
no  interest  and  insures,  the  insurance  is  void,  although  it  is 
expressed  in  the  policy  'interest  or  no  interest*;  and  the  reason 
the  law  goes  upon  is  that  these  insurances  are  made  for  the 
encouragement  of  trade  and  not  for  persons  unconcerned  in 
trade  nor  interested  in  the  ship  to  profit  by  it."  In  the  famous 
case  of  Sadlers'  Company  vs.  Badcock  (1743),  it  was  said  with 
reference  to  fire  insurance  that  "Now  these  insurances  from 
fire  have  been  introduced  in  later  times  and  therefore  developed 
from  assurance  on  ships,  because  there  interest  or  no  interest 
is  almost  constantly  inserted  and  if  not  inserted,  you  cannot 
recover  unless  you  prove  a  property."  The  statutory  definition 
of  the  principle  of  insurable  interest  makes,  therefore,  written 
law  of  what  had  theretofore  been  the  unwritten  or  common 
law  of  England  for  a  long  period  of  time.  The  commercial 
character  of  all  insurance  at  this  early  period  is  clearly  brought 
out  by  the  frequent  reference  to  insurances  as  transactions 
in  trade  and  the  law  of  England,  as  applied  to  both  the  con- 
tractual relations  of  parties  and  the  Parliamentary  supervision 
and  control  over  the  business,  has  been  in  conformity  to  the 
principles  of  the  Law  Merchant,  or,  as  said  by  Lord  Mansfield, 
Chief  Justice  (1777),  "A  policy  of  insurance  is  in  the  nature  of 
it  a  contract  of  indemnity  and  of  great  benefit  to  trade,  but  the 
use  of  it  was  perverted  by  its  being  drawn  into  a  wager  and  to 
remedy  this  evil  the  statute  of  the  19  Geo.  II,  c.  37  (1746), 
was  made." 

164 


origin  and  growth  op  law  and  legislation 

The  Evolution  of  Common  and  Statutory  Law  op 
Insurance. 

The  development  of  English  statute  law  in  conformity  to 
previously  established  principles  of  common  law  is  of  the  utmost 
and  far-reaching  importance.  The  trend  of  modern  law-making, 
so-called,  is  continuously  to  draw  away  from  common  law 
principles,  or  to  set  aside  long-established  legal  definitions  which 
custom  has  sanctioned  and  to  which  immemorial  usage  has 
given  a  definite  and  generally  understood  meaning.  Statutes, 
it  has  well  been  said,  "are  not  reasons,  but  they  are  a  mere 
command,"  but  the  common  law  is  reason,  or  that  law  which 
derives  its  force  and  authority  from  the  universal  consent  and 
immemorial  practices  of  the  people.  The  simple  but  effective 
statutes  of  1746  and  1774  governed  in  the  business  of  insurance 
in  the  American  Colonies  and  they  were  incorporated  in  the 
law  of  the  land,  after  the  Declaration  of  Independence.  The 
business  of  insurance  up  to  that  time  had  been  practically 
limited  to  marine  insurance  and  few  cases  came  before  the 
courts  for  final  adjudication.  In  all  such  cases  the  law  of  Eng- 
land governed  in  essential  matters,  but  particularly  and  with- 
out exception  in  the  judicial  construction  of  principles  of 
insurable  interest.  In  fact,  the  American  courts  adopted  a  far 
more  rigid  construction  of  the  two  statutes  of  1746  and 
1774  than  had  been  the  case  in  England  where  wagering  policies 
were  held  to  be  valid  in  some  cases,  unless  found  to  be  distinctly 
contrary  to  public  policy.  The  early  policies  issued  in  America 
were  identical  in  phraseology  with  the  policies  issued  in  Eng- 
land, including  the  ancient  phrase  that  "It  is  agreed  by  us,  the 
assurers,  that  this  writing  or  policy  of  assurance  shall  be  of 
as  much  force  and  effect  as  the  surest  writing  or  policy  of  assur- 
ance heretofore  made  in  Lombard  Street  or  elsewhere  in  Eng- 
land." That  phrase  occurs  in  a  policy  dated  Philadelphia, 
April  25th,  1749,  the  original  of  which  has  been  preserved 
and  a  facsimile  of  which  has  been  printed  in  Fowler's  History 
of  Insurance,  but  after  the  Declaration  of  Independence  the 
stately  phrase  which  had  been  at  the  head  of  English  and  Con- 

165 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

tinental  policies  from  time  immemorial  "In  the  name  of  God, 
Amen,"  was  omitted  and  the  phrase  previously  referred  to  was 
changed  to  read,  certainly  as  early  as  1788,  "And  it  is  agreed 
by  us,  the  assurers,  that  this  writing,  or  policy  of  insurance,  shall 
be  of  as  much  force  and  effect  as  the  surest  writing,  or  policy  of  as- 
surance heretofore  made  in  any  of  the  United  States  or  elsewhere." 

Judicial  Interpretation  of  American  Insurance  Policies 
IN  Conformity  to  English  Law  and  Customs  of  Trade. 

In  the  judicial  interpretation  of  insurance  contracts,  how- 
ever, English  law  and  usage  determined  the  legality  and 
as  said  in  a  case  which  came  before  the  Supreme  Court 
of  Pennsylvania  in  January,  1795,  "This  case  is  distinguished 
from  that  of  Williams  vs.  Craig.  There  was  no  established  rule 
of  trade  between  France  and  Philadelphia.  Our  trade  with 
that  country  began  and  ended  with  the  American  war.  But 
between  England  and  Philadelphia  a  settled  rule  has  subsisted 
for  many  years,  and  the  usage  has  been  generally  approved  of. 
The  plaintiff's  charge  for  insurance  was  contained  in  every  ac- 
count rendered  to  the  defendant ;  and  as  he  made  no  objection 
thereto,  he  must  necessarily  be  supposed  to  have  acquiesced  in 
the  custom  of  the  EngHsh  merchants."  In  a  similar  case  tried 
before  the  same  court,  also  in  1795,  the  testimony  was  accepted 
that  "  The  defendant's  construction  of  the  policy  was  con- 
formable to  the  general  sense  and  usage  of  merchants  and  this 
view  was  adopted  by  the  Court  and  Jury."  *  Finally,  in  a  case 
decided  at  the  March  term,  1803,  the  Supreme  Court  of  Penn- 
sylvania declared  that  "  We  have  adopted  the  policy  and 
principle  which  gave  rise  to  the  British  statute  of  19  George  II, 
c.  37,  in  courts  of  justice  and  by  commercial  usage,  but  we  are 
not  prepared  to  say  that  every  particular  provision  or  resolution 
tinder  it  has  been  engrafted  into  our  system  of  law."t  A  few 
years  previous  the  Supreme  Judicial  Court  of  Massachusetts  in 
.  the  case  of  Amory  vs.  Gilman  (1800)  reviewed  the  whole  question 

*  3  Dallas,  510. 

t  Fowler,  History  of  Insurance,  p.  66. 

166 


ORIGIN   AND   GROWTH    OP   LAW   AND   LEGISLATION 

of  English  law  as  underlying  American  jurisprudence  in  matters 
of  insurance  it  being  stated  inter  alia  that  "  By  the  com- 
mon law  at  the  time  of  our  ancestors'  emigration  and  for 
nearly  a  century  afterward  such  a  contract  (gambling)  was 
void.  During  the  last  century  the  English  Courts  began  to 
sustain  actions  on  this  species  of  contracts,  but  their  decisions 
have  not  been  adopted  here.  The  ancient  law  of  England 
and  the  usage  of  this  country  must  then  decide  this  question. 
The  forcible  objections  recited  in  the  preamble  to  the  statute 
19  George  II,  c.  37,  received  additional  force  from  our  morals, 
manners  and  the  spirit  of  our  law.  The  question  whether  the 
statute  of  19  George  II  has  been  adopted  here  is  now  before 
the  Court  on  another  section  of  it  (relating  to  re-assurances) 
in  which  it  was  fully  argued.  But  it  is  absurd  to  suppose  that 
our  courts  have  adopted  the  decisions  of  the  English  courts 
in  the  early  part  of  the  last  century,  involving  all  the  mischiefs 
of  these  gaming  policies,  and  yet  have  failed  to  adopt  this 
statute  in  remedy  of  the  evil."  After  an  extended  examination 
of  the  facts  and  legal  principles  involved  in  the  English  court 
decisions  in  plain  conflict  with  the  statute  referred  to,  Justice 
Sedgwick,  observed  in  part  that  "After  reflecting  on  these  obser- 
vations, which  every  man  of  experience  and  a  knowledge  of  the 
human  character  knows  to  be  well  founded,  there  can,  I  think, 
remain  no  doubt  that  it  would  be  hostile  to  the  welfare  of  society 
that  interests  which  men  may  choose  to  create  by  such  contracts 
should  be  protected  by  judicial  authority.  Much  additional 
weight  is  given  to  the  argument  by  the  British  statute,  19 
George  II,  c.  37,  prohibiting  wager  policies.  It  is  the  authority 
of  a  wise  legislature  of  a  nation  most  deeply  interested  in  commerce^ 
and  best  understanding  its  interests ;  and  it  prohibits  them  be- 
cause they  are  "productive  of  many  pernicious  practices." 

Insurance  Contract  Governed  by  Considerations 
OF  Public  Policy. 

Chief  Justice  Dana,  observed  "  We  must,  therefore,  decide 
this  on  general  principles  of  justice  and  good  policy.    The  very 

167 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

forcible  reasons  set  forth  in  the  preamble  of  the  statute,  19 
George  II,  c.  37,  to  which  I  have  before  referred,  apply  equally 
to  this  and  every  other  civilized  and  well-governed  commercial 
country.  Whether  that  statute  extended  to  this  country  or 
not  is  a  question  not  necessary  now  to  be  determined.  But 
if  it  were,  and  we  should  find  no  precedents  in  our  courts  to 
overrule  us,  I  should  be  prepared  to  say  that,  as  wager  policies 
are  injurious  to  the  morals  of  the  citizens,  tend  to  encourage 
an  extravagant  and  peculiarly  hazardous  species  of  gaming, 
and  to  expose  their  property,  which  ought  to  be  reserved 
for  the  benefit  of  real  commerce,  they  ought  not  to  receive  the 
countenance  of  this  court." 

In  a  case  quite  similar,  of  Prit chard  vs.  Insurance  Company 
of  North  America,  Shippen,  Chief  Justice,  in  answer  to  a 
contention  of  counsel  that  the  Gambling  Act  had  not  been 
extended  to  Pennsylvania  by  practice  said,  "Certainly  the 
British  Act  does  not  bind  us,  proprio  vigor e;  but  the  system 
of  national  policy  which  dictated  the  law  has  been  adopted 
by  our  courts.  We  believe  that  policies  made  here,  at  least 
by  the  incorporated  companies,  do  not  retain  the  words 
'interest  or  no  interest.'  "  And,  Yeates,  Justice,  for  the  court 
said:  "The  Chief  Justice,  during  the  argument,  conveyed  the 
sentiments  of  the  whole  court.  We  have  adopted  the  policy 
and  principles  which  gave  rise  to  the  act  of  Parliament, 
both  in  courts  of  justice  and  by  commercial  usage;  but  we 
are  not  prepared  to  say  that  every  particular  provision  or 
resolution  under  it  has  been  engrafted  into  our  system  of  law. 
An  insurance  amongst  us  is  a  contract  of  indemnity.  Its 
object  is  not  to  make  a  positive  gain,  but  to  avert  a  possible 
loss.  A  man  can  never  be  said  to  be  indemnified  against  a 
loss  which  can  never  happen  to  him.  There  cannot  be  an  in- 
demnity without  a  loss,  nor  a  loss  without  an  interest.  A 
policy,  therefore,  made  without  interest  is  a  wager  policy, 
and  has  nothing  in  common  with  insurance  but  name  and  form. 
It  is  not  subservient  to  the  true  interests  of  fair  trade  and  com- 
merce, but  is  pregnant  with  as  much  mischief,  both  public  and 

168 


ORIGIN   AND  GROWTH   OP   LAW  AND   LEGISLATION 

private,  as  can  proceed  from  any  species  of  gaming  which  the 
legislature  has  hitherto  found  it  necessary  to  repress.  Every 
species  of  gaming  contracts  wherein  the  insured  having  no 
interest,  or  a  colorable  one  merely,  or  having  a  small  interest 
much  overvalues  it  in  a  valued  policy,  under  the  cloak  of  insur- 
ances, are  reprobated  both  by  our  law  and  usage."* 

Limited  Extent  of  Insurance  in  the  American  Colonies. 
These  illustrations  from  the  early  history  of  American 
law  sufficiently  prove  that  the  fundamental  principles  of 
English  law  on  the  subject  of  insurance  were  incorporated  into 
the  system  of  American  jurisprudence,  as  being  in  conformity 
to  the  more  ancient  but  controlling  principles  of  the  Law 
Merchant,  or  Lex  Mercatoria.  The  extracts  quoted  also  prove 
conclusively  that  from  the  legal,  as  well  as  the  general,  point 
of  view  insurance  was  considered  an  element  of  commerce  and 
that  insurance  transactions  were  held  to  be  commercial  trans- 
actions not  separate  and  distinct  from  commercial  affairs  gen- 
erally. It  requires  always  to  be  kept  in  mind  that  insurance 
in  the  Colonies  never  attained  to  the  dignity  of  a  corporate 
business  and  that  the  transactions  were,  on  the  whole,  of  small 
extent  and  practically  limited  to  a  few  seaport  towns.  Naturally, 
legislation  was  not  required  to  intervene  in  the  development 
of  such  a  business  and  no  legislative  action  was  called  for 
until  applications  were  made  to  the  different  State  Legisla- 
tures for  charters  to  establish  separate  and  distinct  insurance 
corporations. 

First  Fire  I^^surance  Association  Established  in 
South  Carolina  in  1735. 

The  first  attempt  to  establish  an  insurance  office  in  Massa- 
chusetts had  been  made  as  early  as  1724  by  Joseph  Marion  of 
Boston,  who  four  years  later,  under  date  of  November  18,  1728, 
advertised  a  proposal  to  establish  the  New  England  Sun  Fire 
Office,  which,  however,  did  not  materialize.  In  1735  the  Fire 
*  Wambaugh,  Insurance  Law,  Cases,  p.  16. 

169 


ORIGIN   AND   GROWTH   OF   LAW   AND    LEGISLATION 

Insurance  Friendly  Society  of  Charleston,  S.  C,  came  into 
existence,  but  it  was  only  of  short  duration,  its  career  being 
ended  by  a  disastrous  fire  in  1740,  causing  alossof  $1,500,000.* 
The  public  protection  against  the  fire  risk  was  very  crude 
and  the  first  fire  company  for  protective  purposes  was  not  estab- 
lished in  Philadelphia  until  1738.  Joseph  Marion,  in  1748, 
made  a  second  unsuccessful  attempt  to  establish  the  New  Eng- 
land Sun  Fire  Office,  but  it  was  not  until  1752  that  the  first 
successful  American  fire  insurance  association!  after  the  model 
of  the  London  Amicable  was  established  by  deed  of  settlement  for 
"not  merely  the  mutual  security  of  the  members,  but  for  the 
common  security  and  advantage  of  their  fellow  citizens  and 
neighbors  and  the  promoting  of  a  great  and  public  good  apart 
from  all  motive  of  private  and  separate  gain."  The  name  first 
subscribed  to  this  deed  of  settlement  was  that  of  James  Ham- 
ilton, the  Lieutenant-Governor  of  the  Province  under  the 
proprietors,  and  of  this  it  has  been  said  that  "it  was  the 
name  of  a  public  officer;  announcing  the  approbation  and 
favor  of  the  government,  but  indicating  no  special  participation 
in  originating  the  company."  The  first  private  name  on  the 
document  was  that  of  Benjamin  Franklin,-  who  also  became 
one  of  the  first  Directors.  Franklin  has  often  been  claimed 
to  have  been  the  originator  of  this  plan,  but  it  is  practically 
certain  that  the  author  of  the  project  was  John  Smith,%  and 
Franklin  nowhere  in  his  writings  has  claimed  the  merit 
of  having  founded  the  first  successful  institution  to  transact  the 
business  of  fire  insurance  in  America. § 

*  For  an  account  of  "  Friendly  Society  for  the  Mutual  Insuring  of 
Houses  against  Fire,"  established  in  Charieston,  S.  C,  in  1735,  see  the 
South  Carolina  Historical  and  Genealogical  Magazine  for  Jan.,  1907. 
This  was  probably  the  very  first  fire  insurance  institution  in  America. 

t  The  term  "association"  is  used  here  in  a  general  sense. 

X  "  For  a  statement  of  the  facts,  see  the  accoimt  of  the  Centennial 
Meeting  of  the  Phila.  Contributionship  for  Insurance  of  Houses  from 
Loss  by  Fire,  Phila.,  1852,  p.  22  et  seq." 

§  According  to  James  Schouler,  Franklin  in  1738,  however,  originated  in 
Philadelphia  the  First  Volunteer  Fire  Co.  for  protective  purposes. 

170 


origin  and  growth  op  law  and  legislation 

The  Philadelphia  Contributionship. 

The  society  was  not  incorporated  until  1768.  It  was  never 
more  nor  less  than  a  mutual  fire  insurance  society  and  not  a 
trading  company  or  partnership,  engaged  in  the  business  of 
insurance  within  the  meaning  of  the  Act  of  1720.  It  was  a 
concern  or  an  arrangement  for  the  profit  and  loss  of  the  mem- 
bers, established  by  public  sanction  through  the  participation 
of  a  high  officer  of  State  in  its  organization.  The  business  done 
was  very  small  and  after  ten  years  of  effort  the  amount  of 
insurance  in  force  was  less  than  at  the  end  of  the  first.  The 
company  relied  for  its  success  upon  premium  charges  ill-con- 
sidered with  reference  to  the  true  fire  risk  and  not  until  a  change 
was  adopted  in  1763  by  which  a  guarantee  fund  was  gradually 
accumulated  as  a  safeguard  against  the  conflagration  hazard  did 
the  business  of  the  society  attain  to  considerable  proportions. 
The  society  in  all  its  essentials  was  modeled  after  the  Amicable 
Contributionship,  including  the  use  of  the  sign  of  the  clasped 
hands,  which  later  gave  to  the  London  company  the  name  of 
Hand  in  Hand.  The  management  was  remarkably  able  from 
the  outset  and  during  a  whole  century  of  active  effort  only  one 
lawsuit  was  brought  against  the  institution  and  in  that  the 
company  was  successful.* 

First  Life  Insurance  Institutions  in  America. 

The  Contributionship,  however,  was  not  the  only  insurance 
institution  established  in  Philadelphia  during  the  middle  of  the 
1 8th  Century.  For  similar  reasons  of  mutual  protection  and 
security,  the  Presbyterian  Ministers'  Fund  had  been  chartered 
in  1759  and  ten  years  later  a  more  ambitious  charitable 
''corporation"  of  the  Episcopal  Church.  These  also  were  not  in- 
surance corporations  as  trading  concerns  or  of  general  scope,  but 
rather  special  efforts  in  the  field  of  mutual  aid,  combined  more 
or  less,  in  the  case  of  the  last  named,  with  charitable  assistance 


*  Centennial   Meeting  of  the    Phila.    Contributionship  for  Insurance 
of  Houses  from  Fire,  Memorial  Sketch,  Phil.,  185 1,  p.  49. 

171 


ORIGIN   AND   GROWTH   OP   LAW   AND   LEGISLATION 

from  the  well-to-do.  It  was  explained  in  the  first  account  of 
the  Charitable  Corporation  that  **The  distressed  circumstances 
in  which  the  Episcopal  Clergy  in  the  more  northern  provinces 
of  America  and  especially  the  Missionaries  in  the  Service  of  the 
Society  for  the  propagation  of  the  Gospel,  have  too  frequently 
been  obliged  to  leave  their  families,  had  long  been  a  matter 
of  discouragement  to  many  from  entering  into  the  Ministry  of 
our  Church,  as  well  as  of  regret  to  pioneer  and  worthy  members 
thereof."  A  scheme  was,  therefore,  drawn  up  at  Perth 
Amboy,  N.  J.,  May  12th,  176.8,  and  finally  adopted  by  the 
three  provinces  interested  in  the  matter,  a  charter  for  Penn- 
sylvania being  obtained  on  the  7th  of  Feb.,  1769.  The  charter 
began  with  "George  the  Third  by  the  Grace  of  God"  and  in- 
cluded the  explanation  that  ''corporations  have  by  charter  been 
erected  in  the  provinces  of  Pennsylvania  and  New  Jersey  for 
receiving  moneys  and  dispensing  of  such  sums  of  money  as  may 
be  contributed  and  given  as  a  fund  towards  the  support  and 
relief  of  the  widows  and  children  of  said  clergy;  and  for  the 
further  promotion  of  which  laudable  and  charitable  design," 
etc.,  etc. 

Insurance  Supervision  by  the  Church  op  England. 

It  is  thus  apparent  that,  like  the  Contributionship,  this 
was  not  a  trading  corporation  or  a  business  concern  in  the 
true  sense  of  the  word,  but  a  semi-charitable  enterprise  or 
voluntary  contributionship,  established  for  a  specific  purpose 
and  for  the  use  and  benefit  of  a  special  class.  In  recognition, 
however,  of  the  financial  and  general  fiduciary  consideration 
incurred  in  the  undertaking  by  the  Episcopal  church, 
it  was  provided  in  the  charter,  "And  lastly,  we  do  hereby, 
for  us,  our  heirs,  and  our  successors,  ordain,  order  and 
appoint  that  the  accounts  and  transactions  of  the  said 
corporation,  legally  and  properly  vouched  and  authenti- 
cated shall  from  time  to  time,  and  as  often  as  demanded,  be 
laid  before  the  Lords  Archbishops  of  Canterbury  and  York  and 
the  Bishop  of  London,  for  the  time  being,  or  such  persons  as 

172 


ORIGIN   AND   GROWTH   OF  LAW   AND   LEGISLATION 

they  may  from  time  to  time  appoint  for  that  purpose  in  Amer- 
ica, in  order  that  the  said  Archbishops  of  Canterbury  and  York 
and  the  Bishop  of  London,  for  the  time  being,  or  such  person 
or  persons  appointed  by  them,  as  aforesaid,  may  satisfy  and 
confirm  the  said  accounts,  or  subject  them  to  such  revisal, 
check  and  confirmation  as  may  be  thought  just  and  reason- 
able." *  In  other  words,  the  corporation  was  subject  to  the 
ecclesiastical  authorities  and  the  canon  law  with  a  full  recog- 
nition of  the  principle  of  supervision  and  control  over  its  accounts 
and  actions.  This  is  the  first  instance  of  public  supervision 
and  regulation  of  insurance  in  America  and  it  is  therefore  his- 
torically true,  that  insurance,  practically  from  its  inception  in 
all  civilized  and  commercial  countries,  whether  as  a  business  or 
a  mutual  contributionship,  for  the  purpose  of  gain  or  mutual 
aid,  has  been  a  matter  of  serious  concern  to  government,  in- 
cluding the  ecclesiastical  authorities,  in  the  same  manner  that 
the  contract  has  been  the  subject  of  the  civil  and  canon  law 
from  its  origin  in  ancient  times. 

The  Rules  and  Customs  op  Boston. 

By  1770  there  were  therefore  only  three  insurance  institu- 
tions in  existence  in  Philadelphia,  but  none  of  these,  as  has 
been  shown,  were  commercial  undertakings  or  trading  corpora- 
tions, which,  in  fact,  they  could  not  have  been  without  coming 
in  conflict  with  the  Act  of  i7i9-'2o.  (6  Geo.  I.  c.  18)  which  was 
in  full  force  in  the  Colonies.  In  that  year,  in  fact,  according 
to  Schouler,t  who  is  the  best  possible  authority,  no  fire  insur- 
ance company  had  been  established  in  New  York  City  at  that 
time,  nor  had  several  attempts  to  organize  such  an  institution 

*  "  Some  account  of  the  Charitable  Corporation  lately  erected  for  the 
Relief  of  Widows  and  Children  of  Clerg)mien  in  the  Communion  of  the 
Church  of  England  in  America,"  for  a  copy  of  their  charter  and  funda- 
mental rules,  and  also  a  sermon  preached  Oct.  10,  1769,  before  the  said 
Corporation  on  the  occasion  of  their  first  meeting,  by  Wm,  Smith,  D.  D., 
published  by  order  for  the  benefit  of  the  charity.    Philadelphia ,  1 769,  p.  1 1 . 

t  Americans  of  1776,  by  Jas.  Schouler,  New  York,  1906,  p.  69. 


ORIGIN   AND   GROWTH   OP   LAW   AND   LEGISLATION 

in  Boston  been  successful.  The  Stamp  Act*  of  1765  included 
documentary  duties  upon  all  insurance  policies,  but  this  seems 
not  to  have  attracted  special  attention  or  been  considered 
a  particularly  obnoxious  burden  upon  the  business  by  those 
engaged  therein  at  the  time.  The  Revolution,  naturally,  was 
not  a  favorable  period  for  the  formation  of  chartered  companies 
or  corporations  to  engage  in  the  business  of  insurance,  but  it 
is  on  record  that  in  the  first  year  after  the  peace  the  term  "com- 
pany" was  used  to  give  dignity  and  standing  to  the  insurance 
office  of  some  twenty  associated  individual  underwriters  of 
Boston.  The  difficulties  or  disputes  between  underwriters  and 
the  insured  were,  adjudicated  according  to  the  changed  con- 
ditions and  settled  "agreeable  to  the  Rules  and  Customs  of 
Boston"  and  not  London,  just  as  the  reference  to  Lombard 
Street  and  Royal  Exchange  and  London  had  before  this  been 
eliminated  from  American  policies.  While  the  term  "company" 
was  used  in  the  advertisement  of  Hurd  and  Jeffery  of  Boston, 

*  The  paragraph  in  the  Stamp  Act  referring  to  insurance  reads,  in 
part,  as  follows: 

"And  be  it  further  enacted ,  That  every  deed,  instrument, 

note,  memorandum,  letter,  or  other  minument  or  writing,  for  or  relating 
to  the  pa)mient  of  any  sum  of  money,  or  for  making  any  valuable  con- 
sideration for  or  upon  the  loss  of  any  ship,  vessel,  goods,  wages,  money, 
effects,  or  upon  any  loss  by  fire,  or  for  any  other  loss  whatsoever,  or 
for  or  upon  any  life  or  lives,  shall  be  construed,  deemed,  and  adjudged 
to  be  policies  of  assurance,  within  the  meaning  of  this  act;  and  if  any 

such  deed,   for  insuring,  or  tending  to  insure,  any  more  than 

one  ship  or  vessel  for  more  than  any  one  voyage,  or  any  goods 

or  other  matter  or  thing  whatsoever,  for  more  than  one  voyage,  or  in 
more  than  one  ship  or  vessel,  or  being  the  property  of,  or  belonging  to, 
any  more  than  one  person,  or  any  particular  number  of  persons  in 
general  partnership,  or  any  more  than  one  body  politick  or  corporate, 
or  for  more  than  one  risque;  then,  in  every  such  case,  the  money  insured 
thereon,  or  the  valuable  consideration  thereby  agreed  to  be  made,  shall 
become  the  absolute  property  of  the  insured,  and  the  insurer  shall  also 
forfeit  the  premium  given  for  such  insurance,  together  with  the  sum 
of  one  hundred  poimds."  Select  Charters  and  other  Documents  illustra- 
tive of  American  History,  1606-1775,  edited  by  Wm.  Macdonald.  New 
York,  1899,  PP-  289-390. 

174 


ORIGIN    AND   GROWTH    OP   LAW   AND   LEGISLATION 

there  were  no  incorporated  or  chartered  institutions  engaged 
in  the  business  of  insurance  in  Massachusetts  or  New  York  in 
the  first  year  of  the  RepubHc,  except  the  three  institutions  in 
Philadelphia,  which  do  not  properly  come  within  the  definition 
of  insurance  companies  as  trading  concerns. 

First  Massachusetts  Insurance  Charters. 

For  the  apparently  insignificant  reason  that  the  Philadel- 
phia Contributionship  would  not  accept  risks  upon  buildings 
surrounded  by  trees,  a  "Mutual  Assurance  Company"  for 
insuring  houses  from  loss  by  fire  in  and  near  Philadelphia  was 
organized  in  1784.  The  company  became  known  as  the  Green 
Tree  Company,  but  in  its  organization  differed  little  from  the 
contributionships.  The  time,  however,  had  come  with  the 
return  of  peace  and  prosperity  for  the  more  serious  considera- 
tion of  establishing  insurance  companies  with  sufficient  capital 
to  give  real  instead  of  fancied  security  to  the  insured.  In  1785 
a  petition  was  presented  to  the  Massachusetts  Legislature  to 
permit  of  the  establishment  of  a  fire  insurance  company  in 
Boston,  but  according  to  Hardy*  the  petition  was  rejected 
**as  not  being  for  the  advantage  of  the  Town."  Evidently  the 
principle  of  insurance  as  a  matter  of  corporation  enterprise  had 
made  small  progress  even  in  the  populous  centers  of  trade  on 
the  Atlantic  seaboard.  The  Massachusetts  Congregational 
Charitable  Society  was  established,  however,  in  1786,  probably 
identical  in  aims  and  purposes  with  the  corporation  of  a  corres- 
ponding character  established  by  the  Episcopal  Church.  In  all 
these  and  similar  cases  the  object  seems  rather  to  have  been  to 
provide  for  a  small  or  special  class  of  persons  than  to  further 
the  principle  of  insurance  as  applicable  to  the  masses  of  the 
people.  Life  insurance  at  this  time  was  a  matter  of  mere  crude 
speculation,  but  as  early  as  1789  Wigglesworth,  a  Massachusetts 
clergyman,  had  calculated  a  life  table  from  the  more  or  less 
trustworthy  vital  records  of  a  few    selected    counties    of    the 

♦  Early  Insurance  Offices  in  Massachusetts,  by  E.  R.  Hardy,  p.  57. 

175 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION    , 

State.  The  Rev.  Mr.  Gordon*  in  a  sermon  preached  in  Boston 
in  1772  had  argued  in  favor  of  extending  life  insurance  to  the 
general  population,  but  nothing  had  come  of  it,  except  that  some 
encouragement  was  given  to  promoting  tontine  schemes,  which 
came  perilously  near  to  being  in  conflict  with  the  provisions 
of  the  Gambling  Act. 

Annuity  Proposals  Before  the  Continental  Congress. 

Law  and  legislation  on  insurance  were  hardly  required  under 
conditions  like  these.  It  would  have  been  absurd  to  legislate 
regarding  a  business  which  was  of  such  very  limited  extent  as 
insurance.  Lotteries  were  common  and  absorbed  most  of  the 
surplus  earnings  of  the  mass  of  the  people.  The  Continental 
Congress  had  considered  various  annuity  schemes  and  a  com- 
mittee on  the  subject  had  been  appointed  in  Nov.,  1779,  but 
earlier  than  this,  that  is,  April,  1779,  it  had  been  "Resolved 

that    million  dollars  be  borrowed  on    the    faith 

of  these  United  States  in  annuities  for  one  life  at  ....  % 
and  ....  %  for  two  lives,  without  distinction  of  age,  that  the 
annuity  shall  not  be  for  less  than  50  dollars  on  one  life  and  75 
dollars  for  two  lives  yearly  income.  Strangers  not  naturalized, 
or  citizens  or  subjects  of  any  nation  or  country  may  acquire 
the  said  annuities,  which  shall  not  be  liable  to  forfeiture  or 
confiscation,  even  in  case  of  war  between  the  United  States 
and  the  country  of  which  the  annuitant  may  be  a  citizen." 
Finally  it  was  suggested  that  the  Board  of  Treasury  be  author- 
ized to  take  the  proper  measures  to  carry  said  resolution  into 
effect.  The  Committee  on  the  Treasury,  under  date  of  April  21, 
1779,  recommended  "that  twelve  million  dollars  be  borrowed 
on  life  annuities.  Your  Committee  have  reason  to  think  that 
a  plan  of  this  nature  would  be  very  acceptable  to  the  citizens 


*  The  title  of  this  work  is  "  The  Plan  of  a  Society  for  Making  Provi- 
sions for  Widows  by  Annuities  for  the  Remainder  of  Life,  and  for  Grant- 
ing Annuities  to  persons  after  Certain  Ages,  with  the  proper  tables  for 
calculating  what  must  be  paid  by  the  several  members  in  order  to  secure 
the  said  advantages,"  by  Wm.  Gordon,  Boston,  1772. 

176 


ORIGIN   AND   GROWTH   OP   LAW   AND   LEGISLATION 

of  these  States  and  meet  with  great  encouragement."  *  No 
action  was  taken  by  the  Congress  in  this  matter,  but  the  pro- 
posals are  of  much  historical  significance,  and  the  first  sugges- 
tions for  Government  Annuities  in  the  United  States.  The 
refusal  of  the  Continental  Congress  to  act  in  the  matter  was, 
no  doubt,  due  to  the  fact  that  the  outlook  for  practical  success, 
considering  the  poverty  of  the  country  and  the  novelty  of  the 
idea,  was  very  doubtful. 

Underwriters'  Agreements  Before  the  Revolution. 

The  insurance  partnerships,  or  so-called  **  companies,"  in 
Boston  had,  no  doubt,  been  established  after  similar  enter- 
prises in  Philadelphia,  dating  from  1757.  There  also  an  effort 
to  organize  a  company  had  failed  (as  fail  it  had  to,  because  of 
the  prohibitory  Act  of  1720),  but  a  branch  office  was  estab- 
lished in  New  York  on  August  21st,  1759,  which  illustrates  the 
viewpoint  common  to  the  period,  that  in  all  matters  of  trade, 
including  insurance.  State  lines  were  not  a  hindrance  to  the 
greatest  possible  development.  Nor  was  there  much  need  of 
apprehending  a  conflict  with  some  other  Provincial  authority, 
since  all  insurance  was  transacted  simply  by  conforming  to  com- 
mon law  principles  designed  to  protect  the  public  against  fraud. 
The  first  combination,  more  or  less  in  the  nature  of  restraint 
of  trade  in  insurance,  including  the  "fixing"  of  rates,  was 
perfected  in  Philadelphia  as  early  as  Feb.  12,  1762,  and  many 
similar  arrangements  for  the  protection  of  the  underwriters  were 
entered  into  from  time  to  time,  all  being  more  or  less  ineffective 
on  account  of  increasing  competition.  In  1762  it  was  again  pro- 
posed to  organize  an  insurance  "company"  in  Philadelphia,  but 
nothing  came  of  the  effort.  In  1766  a  very  suggestive  arrange- 
ment was  entered  into  by  the  several  industrial  undertakings 
of  Philadelphia  and  in  1774  a  "New  Lloyds  Institution"  was 

*  Journals  of  the  Continental  Congress,  published  by  the  Library  of 
Congress,  Worthington  C.  Ford,  Editor,  Washington,  1909,  Vol.  XIV, 
p.  520. 

177 


ORIGIN   AND   GROWTH   OP  LAW   AND   LEGISLATION 

established,  no  doubt  in  opposition  to,  but  largely  on  the  plan 
of  the  Lloyds  of  London. 

Effect  of  War  Upon  Premium  Rates. 

The  first  meeting  of  the  Continental  Congress  (Sept.  4) 
this  year  put  an  end  to  all  hopes  of  a  peaceful  settlement  of 
the  difficulties  with  the  mother  country,  and  insurance  rates 
rapidly  increased,  particularly  in  the  seacoast  towns.  The 
effect  of  war  on  fire  insurance  premiums  in  New  York  is  evi- 
denced by  the  statement  that  **We  do  not  so  much  as  think 
of  shipping  anything  to  anybody  till  we  see  affairs  wear  a  very 
different  aspect;  indeed,  all  our  other  friends  with  you  posi- 
tively forbid  us  to  ship  a  single  article  until  further  orders, 
and  seem  much  surprised  that  they  have  any  goods  coming. 
Twelve  Guineas  per  cent,  premium  is  now  given  here  to  insure 
goods  at  New  York  from  fire  and  the  enemy  till  ist  of  April 
next,  and  Twenty  Guineas  per  cent,  have  been  given  to  pay 
a  loss,  if  our  troops  are  not  in  possession  of  New  York  the  first 
of  this  month,  and  we  have  every  appearance  of  a  French  and 
Spanish  war."*  But,  of  course,  the  chief  effect  of  the  war  was 
upon  the  insurance  premium  upon  shipping,  which  often  reached 
prohibitive  proportions.  The  Government  was  concerned  with 
other  matters  than  insurance;  even  if  the  business  had  called 
for  such  attention,  the  transactions  were  of  too  limited  an 
extent  to  merit  much  consideration  as  a  possible  source  of 
taxation.  When,  therefore,  the  Constitutional  Convention  met 
in  1789  insurance  was  about  the  last  and  the  least  demanding 
inclusion  in  the  deliberations  of  that  body,  being  thought  of, 
no  doubt,  as  a  mere  incident  of  general  trade,  although  at  least 
three  of  the  delegates  to  the  Convention  were  personal  under- 
writers.! The  commerce  clause,  as  finally  adopted,  in  admir- 
able terms,  comprehended  all  the  instrumentalities  of  commerce, 
then  in  use  or  subsequently  to  be  developed,  and  while  not 
specifically  mentioned,  as  a  needless  qualification  of  a  general 

*  Fowler,  History  of  Insurance,  p.  31. 
t  Ibid,  p.  40. 

178 


ORIGIN   AND   GROWTH   OP  LAW  AND   LEGISLATION 

principle,  insurance  (in  view  at  least  of  what  has  here  been 
written)  was  undoubtedly  understood  by  the  framers  of  that 
instrument  to  come  within  the  meaning  and  scope  of  the 
commerce  clause.* 

Insurance  at  the  Time  of  the  Constitutional  Convention. 

The  foregoing  account  of  the  origin  and  development  of 
American  insurance  practice,  law  and  institution,  to  the  year 
of  the  Constitutional  Convention  in  1789  is  a  full  and  complete 
refutation  of  the  wholly  unwarranted  statement  in  the 
Report  of  the  House  Committee  on  the  Judiciary  upon 
the  Regulation  of  Corporations  and  the  constitutional 
aspects  of  insurance  regulation  by  the  Federal  govern- 
ment. In  that  report  it  is  stated  that  "Insurance  is 
not  some  new  matter,  developed  after  the  Constitution  was 
adopted,  like  railroads  and  telephones  and  things  of  that  kind, 
but  insurance  was  well  known  long  before  the  Constitution 
was  adopted  and  insurance  companies  were  in  active  operation 
in  this  country  long  before  the  adoption  of  the  Constitution, 
and  ever  since  the  adoption  of  the  Constitution  it  has  not  been 
considered  as  an  article  of  commerce."  There  were  no  insur- 
ance corporations  in  1789,  nor  could  there  have  been  on  account 
of  the  Act  of  1720,  which  distinctly  forbade  their  formation  in 
the  colonies,  and  it  was  wholly  improbable  that  such  corporations 
should  have  come  into  existence  during  the  trying  times  of  the 
Revolution,  when  men  had  other  things  to  do  than  experiment 
in  new  fields  of  finance,  or  engage  in  even  quasi-public  enter- 
prise of  this  kind.  The  Committee  on  Judiciary  of  the  House 
of  Representatives  had,  therefore,  no  evidence  to  support  the 
statement  just  quoted  but  upon  which  they  rest  in  part  at  least 

*  The  fullest  discussion  of  the  whole  question  of  insurance  as  an  ele- 
ment of  commerce  within  the  meaning  of  the  commerce  clause  of  the 
Constitution,  is  to  be  foimd  in  Papers  and  Addresses  of  John  F.  Dryden, 
President  of  the  Prudential  Ins.  Co.  of  America,  Newark,  N.  J.,  1910, 
Chapter  XIX ;  see  also  the  Argument  for  Federal  supervision  of  insur- 
ance, prepared  for  the  Senate  Committee  on  Judiciary,  by  Richard  V. 
Lindabury,  of  Newark,  N.  J. 

179 


ORIGIN   AND  GROWTH   OF  LAW  AND   LEGISLATION 

their  argument  that  insurance  is  not  within  the  meaning  of  the 
commerce  clause.  The  Supreme  Court  decisions,  to  which 
subsequent  reference  will  be  made,  seem  to  have  no  con- 
clusive bearing  upon  the  question  whether  the  business  of 
interstate  insurance,  which  now  constitutes  82%  of  the 
existing  amount  of  life  insurance  contracts  in  force  in  the  United 
States  is  within  the  meaning  of  the  commerce  clause  of  the 
Constitution  or  not.  The  Supreme  Court  never  considered 
this  particular  question,  which  is  separate  and  distinct  from 
the  cases  which  have  been  decided  and  it  would  be  an  abject 
surrender  of  legislative  authority  on  the  part  of  Congress  to 
hold  that  Congress  cannot  rightfully  legislate  upon  the  subject, 
leaving  it  of  course  to  the  Court  to  decide  whether  such  legis- 
lation would  be  constitutional  or  not.  The  whole  history  of 
the  business  of  insurance  is,  in  fact,  opposed  to  the  theory  that 
insurance  is  not  commerce  or  an  element  of  commerce  by  the 
common  consent  of  the  commercial  nations  of  the  world. 

Beginning  of  Corporate  Insurance  Enterprise 
IN  America. 

Insurance  companies  in  America,  properly  to  be  so-called, 
as  distinct  from  the  four  associations  (all  limited  to  Phila- 
delphia) which  have  been  referred  to,  did  not  come  into  existence 
until  1794,  or  five  years  after  the  adoption  of  the  Constitution. 
A  number  of  persons  interested  in  or  familiar  with  insurance 
principles  had  hoped  to  carry  a  tontine  and  annuity  proposi- 
tion into  effect,  and  which  at  the  time  was  attracting  some 
public  attention.  They,  therefore,  organized  in  1792  the  Uni- 
versal Tontine,  and  contemplated,  no  doubt,  to  transact  business 
in  all  the  states  then  constituting  the  Federal  union.  The 
originators  of  this  plan  included  citizens  of  Philadelphia  and 
Boston  and  the  scheme  was  based  upon  the  idea  of  the  Boston 
Tontine  Association,  established  in  1791,  which  also  failed  of 
its  original  intent  and  ultimately  became  a  State  Bank  (the 
Union).  A  similar  proposition  in  New  York  also  came  to  noth- 
ing, but  out  of  the  plan  of  the  Universal  Tontine,  which,  as 

180 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

the  name  implies,  purposed  to  be  national  or  general  in  its 
scope,  developed  the  Insurance  Company  of  North  America, 
which  also,  as  its  very  name  proves  beyond  the  peradventure 
of  a  doubt,  intended  to  become  a  national  institution  and  not  a 
local  trading  concern — national  and  commercial  and  unequiv- 
ocally within  the  meaning  and  the  scope  of  the  commerce  clause 
of  the  Constitution,  adopted  but  three  years  before. 

The  organization  of  this  company  (which  is  still  in  a  very 
flourishing  condition,  after  117  years)  was  completed  in  the 
same  room  of  Independence  Hall,  in  which  16  years  before  the 
Declaration  of  Independence  had  been  adopted  and  while  yet 
a  mere  organization  and  without  a  charter  and  not  even  certain 
of  obtaining  one,  it  was  proposed  by  the  8th  Article  of  Asso- 
ciation "to  make  such  insurance  upon  vessels  and  merchandise 
at  sea  or  going  to  sea,  or  upon  the  life  or  lives  of  any  person 
or  persons,  or  upon  any  goods,  wares,  merchandise,  or  other 
property  gone,  or  going,  by  land  or  water;  at  such  Rates  of 
Insurance  or  Premium  as  they  shall  deem  advisable."  The 
first  policy  of  insurance  issued  contained  the  phrase  "and  it 
is  agreed  by  us  the  assurers  that  this  writing  or  policy  of  insur- 
ance shall  be  of  as  much  force  and  effect  as  the  surest  writing 
or  policy  of  insurance  theretofore  made  in  any  of  the  United 
States  or  elsewhere." 

First  Insurance  Legislation  in  the  United  States. 

The  plan  for  the  new  organization  was  received  with  much 
public  approval  and  steps  were  taken  to  procure  a  charter, 
and  in  the  meantime  business  was  commenced  at  once.  A  Bill 
was  accordingly  introduced  into  the  Legislature  of  Pennsyl- 
vania, dated  April  2,  1793,  which  is  the  earliest  authentic  date 
on  record  of  legislative  action  in  America  since  the  adoption 
of  the  Constitution  towards  creating  an  insurance  corporation 
as  a  trading  concern.  The  act  reads  in  part  "Whereas  a  com- 
pany has  been  formed  in  the  city  of  Philadelphia  and  a  com- 
petent capital  thereto  subscribed  for  the  purpose  of  carrying 
on  the  business  of   insurance   and  application   has  been  made 

181 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

to  the  Legislature  by  the  said  company  for  an  act  of  incor- 
poration. In  order  therefore  to  promote  an  institution  which 
by  alleviating  the  risks  and  losses  incident  to  trade  and  navi- 
gation must  in  its  operations  be  equally  beneficial  to  the  agri- 
cultural and  commercial  interests  of  the  state,  etc." 

In  anticipation  of  opposition  in  the  Legislature  to  the 
granting  of  a  charter,  which  many  supposed  would  confer 
monopolistic  powers  and  privileges  equal  to  those  of  the  two 
London  Companies,  a  carefully  framed  petition  had  been  pre- 
sented to  the  Legislature  under  date  of  Dec.  i8,  1792,  which 
in  part  read  as  follows: 

"That  your  petitioners,  attached  to  the  public  welfare,  be- 
hold with  the  greatest  satisfaction  the  commercial  pursuits  and 
interests  of  the  United  States  becoming  daily  more  numerous 
and  important;  but  they  have  long  regretted  that,  for  want  of 
sufficient  number  of  underwriters  of  responsibility  n  the  prin- 
cipal cities  and  towns  of  the  United  States,  commerce  is  Bur- 
thened  with  the  charge  of  commissions  to  European  correspon- 
dents for  effecting  insurances,  and  large  sums  of  money  are 
consequently  drained  from  the  country." 

In  continuation  it  was  said: 

"That  your  petitioners  humbly  conceive  that  considerable 
benefits  will  result  from  this  association  as  well  to  the  citizens 
of  this  commonwealth  in  general,  as  to  the  mercantile  part  of 
this  community  in  particular,  by  retaining  in  the  state  the 
money  invested  in  their  capital  stock  and  the  large  sums  that 
must  otherwise  be  drawn  from  the  country  for  premiums  of 
insurance,  by  relieving  commerce  from  the  present  tribute  paid 
to  foreign  underwriters,  and  by  securing  the  assured  through 
the  means  of  an  ample  capital  stock  from  a  possibility  of  loss, 
which  in  the  manner  of  making  insurances  heretofore  practiced 
both  frequently  happened  through  the  failure  of  individual 
underwriters." 

State  Recognition  op  Insurance  as  an  Element  op 
Commerce. 

The  references  to  the  benefits  resulting  to  commerce  from 
insurance  are  extremely  suggestive,   particularly  when  taken 

182 


ORIGIN   AND   GROWTH    OF   LAW   AND   LEGISLATION 

into  consideration  with  similar  implications  in  the  Bill  itself. 
The  opposition  consisted  chiefly  of  individual  underwriters, 
whose  interests,  however,  were  briefly  considered  in  the  report 
upon  the  Bill  made  to  the  Legislature  under  date  of  March  1 1 , 
1793.     In  that  report  it  is   said 

"That  no  commerce  or  navigation  could  be  beneficially 
conducted  without  insurance,  no  body  chusing  to  commit  con- 
siderable property  to  the  ocean,  without  guarding  against  the 
numerous  accidents  to  which  it  would  be  thereby  exposed. 

That  insurance  cannot  be  so  well  conducted  by  individuals 
as  by  an  incorporated  company,  for  want  of  that  identity  that 
would  enable  such  a  company  to  be  sued  in  case  of  loss,  where 
justice  could  be  had  much  more  speedily  than  in  suing  every 
separate  underwriter  to  a  policy,  a  work  of  such  immense 
expense  and  loss  of  time,  as  frequently  to  defeat  entirely  the 
object  of  insurance. 

That  solidity  is  also  to  be  considered,  which  it  is  impossible 
to  attain  with  certainty  with  private  underwriters,  whereas  this 
Company's  proposed  capital  of  600,000  dollars  in  the  public 
funds,  will  be  a  sufficient  guarantee  to  those  who  employ  them. 

That  already  the  charges  of  insurance  have  been  consider- 
ably abated  since  the  establishment  of  this  company,  whereby 
a  great  saving  to  the  mercantile  body  is  effected,  who  can 
afford  to  give  so  much  more  for  the  produce,  as  they  pay  less 
for  insuring  it. 

That  the  number  of  persons  underwriting  in  Philadelphia, 
does  not  at  present  exceed  about  fifty,  and  the  risques  they 
take,  being  on  an  average  only  about  ;£20o,  on  a  single  bottom, 
of  course  only  about  £10,000  can  now  be  insured  at  the  dif- 
ferent offices  here  on  a  single  risque,  which  occasions  a  drain 
of  money  for  insurance  to  Europe,  or  to  the  neighboring  States, 
very  prejudicial  to  the  body  of  this  one. 

That  it  is  not  in  the  contemplation  of  the  petitioners  to 
exact  or  ask  for  themselves  any  exclusive  privilege  of  insurance, 
so  that  those  private  underwriters,  or  any  others,  may  still 
go  on  to  insure,  as  heretofore,  for  those  who  will  employ  them; 
consequently  that  only  a  competition  on  a  more  enlarged  scale 
will  ensue  very  beneficially  to  the  carrying  on  of  the  business 
in  question. 

That  in  almost  all  commercial  countries  similar  incor- 
porations exist;  that  in  our  own  there  are  such  for  insuring 


ORIGIN   AND   GROWTH   OP   LAW   AND   LEGISLATION 

houses  from  loss  by  fire,  it  would  not  be  easy  to  shew  why  the 
present  Company  should  not  be  incorporated  on  the  same  or 
like  principles." 

Conformity  to  English  Law  and  Precedent. 

Accordingly  the  Committee  resolved  to  bring  in  the  Bill 
referred  to.  The  legislative  history  of  the  measure  reveals 
much  valuable  information  concerning  views  on  the  commercial 
aspects  of  insurance  and  the  reasons  for  its  ultimate  passage 
as  an  act  conducive  to  the  advancement  of  trade.  As  a  com- 
promise, however,  it  was  finally  agreed  to  incorporate  also  and 
at  the  same  time  "  The  Insurance  Company  of  the  State  of 
Pennsylvania,"  practically  repeating  the  statute  of  6  George 
I  (1720),  establishing  by  Royal  Charter  two  insurance  ex- 
ploitations at  the  same  time,  that  is,  the  Royal  Exchange  and 
the  London  Assurance.  The  bill  for  the  charter  of  the  Insurance 
Company  of  North  America  was  signed  by  Governor  Mifflin 
on  the  14th  of  April,  and  the  bill  for  the  chartering  of  the 
Pennsylvania  company  on  April  i8th,  1794.  Thus  came  into 
existence  the  first  two  insurance  companies,  properly  to  be  so 
called,  in  the  United  States  of  America. 

No  Restraint  upon  Interstate  Trade  in  Insurance. 

The  business  of  the  Insurance  Company  of  North  America 
at  the  outset  was  chiefly  that  of  marine  underwriting,  which 
always  has  been  and  by  its  nature  must  be  more  or  less  inter- 
state and  international  in  scope  and  character.  The  fire  busi- 
ness at  first  was  limited  to  the  city  of  Philadelphia,  but  as  early 
as  1795  "th®  field  was  enlarged  to  a  territory  of  ten  miles  around 
the  city,  which,  of  course,  included  a  part  of  New  Jersey.  It 
gradually  became  the  practice  to  issue  policies  in  other  places 
and  the  business  was  systematically  extended  from  year  to 
year.  In  1807  upon  a  special  request  that  the  company  ope- 
rate in  Lexington,  Ky.,  a  committee  was  appointed  to  consider 
as  to  whether  it  would  be  to  the  benefit  and  prosperity  to 
extend  insurance  against  fire  generally  to  other  cities  and  towns 

184 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

in  Other  states,  and  after  this  agents  were  gradually  appointed 
throughout  the  country.  A  London  company,  the  Phoenix, 
had  likewise  established  agents  through  the  different  states  and 
in  neither  case  was  it  assumed  to  be  necessary  to  obtain  special 
legislative  permission  from  the  several  states  to  transact  an 
interstate  business  in  insurance,  any  more  than  this,  under  the 
new  Constitution,  was  necessary  for  the  interstate  development 
of  business  generally.  The  Phoenix  had  come  to  the  United 
States  in  1806,  but  it  only  remained  for  a  few  years,  returning 
to  the  United  States,  however,  in  1879. 

Insurance  National  in  Scope  and  Operation. 

A  record  has  fortunately  been  preserved  of  an  advertise- 
ment of  the  Insurance  Company  of  North  America,  published 
widely  throughout  the  country  at  the  time,  dated  February 
13th,  1796,  in  which  it  is  stated  that  *'  The  Insurance  Company 
of  North  America  [offer]  to  accommodate  the  publick  throughout 
the  United  States  with  respect  to  insurance  for  fire,  etc.,  etc."  It, 
therefore,  requires  no  further  proof  that  the  company  assumed 
from  the  outset  of  its  business  operations  that  its  field  would  be 
the  whole  United  States  and  not  the  state  of  Pennsylvania,  only 
and  that  its  charter  rights  and  privileges  included  the  authority 
to  do  an  interstate  business.  In  this  respect  the  company 
did  not  stand  alone,  for  the  next  most  important  institution  of 
its  kind,  the  Massachusetts  Fire  and  Marine,  chartered  under 
date  of  June  25,  1795,  but  operating  under  a  charter  limited 
to  a  period  of  twelve  years,  announced  as  early  as  September 
23d  of  that  year  that  *'  The  company  will  receive  proposals 
for  insurance  from  any  of  the  cities  of  Massachusetts,  New 
Hampshire,  Rhode  Island  and  Connecticut."  There  can, 
therefore,  be  no  doubt  but  that  the  position  of  these  early 
companies  was  from  the  outset  in  favor  of  a  national,  rather 
than  a  local,  and  interstate  rather  than  an  intrastate  business, 
and  they  had  no  reason  to  think  otherwise  until  state  jealousy 
and  retaliation  brought  about  a  condition  of  law  and  legis- 
lation properly  described  as  interstate  chaos. 

185 


origin  and  growth  of  law  and  legislation 

Advantages  of  Insurance  Transacted  by  Corporations. 

The  Massach-usetts  Fire  and  Marine  Insurance  Company 
had  its  origin  in  a  petition  to  the  Massachusetts  Legislature 
in  1795,  in  which,  among  other  forcible  arguments  in  favor 
of  insurance  by  an  incorporated  company,  it  was  stated  that 
**  The  early  establishment  and  continuance  of  similar  Insti- 
tutions in  all  parts  of  Europe  may  be  produced  as  conclusive 
evidence  of  their  beneficial  effects.  And  Experience  has  taught 
that  this  species  of  Insurance  must  be  performed  by  Com- 
panies, or  corporate  Bodies, .  having  large  and  permanent 
Funds  at  immediate  command,  in  order  that  the  business  riiay  be 
carried  to  so  great  an  Extent  as  to  embrace  any  object  that 
may  offer,  and  still  afford  full  Security  to  the  Insured,  without 
producing  inevitable  Ruin  to  the  Insurers,  in  the  greatest 
Losses  that  may  probably  take  place."  In  answer  to  this  peti- 
tion a  carefully  framed  charter  was  approved  by  the  Legis- 
lature, dated  June  25,  1795,  in  which  the  name  of  the  new 
company  was  given  as  "  The  Massachusetts  Fire  Insurance 
Company." 

Inception  of  State  Supervision  and  Control 
IN  Massachusetts. 

The  charter  of  the  company  required  the  capital  to  be 
invested  either  in  the  funded  debt  of  the  United  States,  or  the 
State  of  Massachusetts,  or  of  any  incorporated  Bank  in  the 
State,  thus  early  establishing  the  important  principle  of  limited 
legislative  control  over  the  investments  of  insurance  companies' 
funds.  It  was  further  provided  that  "no  proprietor  or  voter 
shall  be  entitled  to  more  than  ten  votes,"  by  which  the  Legis- 
lature asserted  its  right  to  control  the  management  of  an  insur- 
ance company  in  the  interests  of  the  general  public.  The 
charter  was  for  a  term  of  only  twelve  years,  emphasizing  the 
importance  placed  upon  legislative  control  of  institutions  of 
this  kind  and  the  right  to  terminate  the  existence  of  an  insti- 
tution which  might  under  certain  circumstances  prove  con- 
trary to  the  public  good.     The  principle  of  charter  limitation 

186 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

may  have  been  copied  from  the  old  Hamburg  Marine  Insurance 
Company  , which  from  1765  operated  under  successive  charters 
of  ten  years'  duration  for  many  years.  The  national  character 
of  the  Massachusetts  company,  as  previously  stated,  was  asserted 
from  the  outset,  but  as  a  matter  of  permanent  record,  the  follow- 
ing advertisement,  published  under  date  of  November  11,  1795, 
is  given  in  full:  "  The  President  and  Directors  of  the  Massa- 
chusetts Fire  Insurance  Company,  hereby  give  notice,  That 
they  shall  not  in  future,  confine  their  Business  to  the  four 
Eastern  States,  but  will  receive  Proposals  at  their  Office,  in 
State  Street,  and  make  insurance  for  any  citizens  of  the  United 
States,  on  Dwelling- Houses,  Stores,  and  all  other  Buildings; 
and  on  Goods,  Wares  and  Merchandise  agreeably  to  their 
Rules  and  Regulations,  as  heretofore  published.  By  Order 
of  the  Board  of  Directors,  Samuel  Cabot,  Sec'ry.  N.  B.  The 
Printers  throughout  the  United  States  are  requested  to  publish 
this  Advertisement.  Boston,  Nov.  11,  1795."  The  advertise- 
ment conforms  to  the  corresponding  announcements  of  the 
Insurance  Company  of  North  America  and  indicates  that  com- 
petition, aside  from  other  reasons,  would  suggest  a  national 
scope  of  operations  as  legitimate  and  within  the  charter  rights 
and  privileges  of  the  company. 

The  Boston  Fire  and  Marine. 

The  commercial  aspects  of  the  business  are  also  clearly  indi- 
cated in  an  early  notice,  dated  "Fire  Office,"  October  7,  1797, 
in  which  occurs  the  statement  that  "The  Company  insures  on 
Estates  held  on  Mortgage,  or  lease  for  years,  and  to  accommodate 
Trade,  on  Goods  for  one  month  or  more."  But  the  business 
was  small  and  in  three  years  the  company  had  written  only 
1,096  policies.  It  is  estimated  that  probably  not  over  three  or 
four  hundred  individuals  had  taken  out  fire  insurance  with  the 
company  during  this  period.  To  increase  the  insurance  it  was 
decided  to  add  a  marine  branch  and  after  the  usual  petition 
had  been  presented  to  the  Legislature  an  amended  charter 
was  granted  on  the  13th  of  February,  1799,  by  which  the  name 


ORIGIN   AND   GROWTH   OP   LAW   AND   LEGISLATION 

of  the  company  was  changed  to  "The  Massachusetts  Fire  and 
Marine  Insurance  Company."  A  similar  petition  having  been 
presented  the  same  year,  praying  for  a  charter  to  estabHsh  "The 
Boston  Marine  Insurance  Company,"  both  charters  were  granted 
at  the  same  time,  probably  in  imitation  of  the  charter  of  two  sim- 
ilar institutions  in  London  in  1720  and  in  Philadelphia  in  1794. 

Beginnings  of  State  Supervision  and  Control  in  1799. 

The  Act  under  which  the  Massachusetts  Fire  and  Marine 
Insurance  Company  was  re-incorporated  is  of  great  historical 
value  in  connection  with  inquiries  into  the  origin  of  insurance 
law  and  legislation  in  the  United  States  of  America.  The  new 
charter  imposed  additional  requirements  upon  the  company 
and  among  others  the  duty  "That  said  Corporation  previous 
to  their  issuing  any  Marine  Policy  of  Insurance,  shall  publish 
in  two  of  the  Boston  newspapers  the  amount  of  their  actual 
Funds,  the  periods  when  the  remainder  will  be  paid,  the  greatest 
amount  to  be  taken  upon  any  one  Vessel  or  house,  and  the 
risques  they  propose  to  insure  against ;  and  they  shall  keep  a  fair 
printed  copy  thereof  in  some  conspicuous  place  in  their  Office, 
and  publish  the  same  annually.  And  the  Real  Estate  which 
said  Corporation  are  authorized  and  empowered  to  hold  and 
purchase  for  transacting  the  business  of  said  Company,  may 
be  to  the  value  of  Twenty  Thousand  Dollars  and  no  more."  a 
further  qualification  was  the  limitation  of  the  new  charter  to 
a  period  of  twenty  years  and  to  this  limitation  was  added  the 
extremely  significant  requirement  by  Sec.  8,  that  "the  President 
and  Directors  of  said  Corporation  shall  when,  and  as  often  as 
required  by  the  Legislature  of  this  Commonwealth,  lay  before 
them  such  a  statement  of  their  affairs,  as  the  said  Legislature 
may  deem  it  expedient  to  require,  and  submit  to  an  examin- 
ation thereon  under  oath." 

By  this  important  section  the  principle  of  state  supervision 
and  control  over  the  business  of  an  insurance  corporation  was 
established,  practically  at  the  very  beginning  of  corporate 
underwri tings  in  the  United  States,  and  I  cannot  do  better 

188 


ORIGIN   AND   GROWTH   OP   LAW   AND   LEGISLATION 

than  quote  the  words  of  Mr.  E.  R.  Hardy,  who  first  called 
public  attention  to  this  remarkable  document  and  who,  in  com- 
menting upon  this  particular  provision,  said  "The  section  that 
perhaps  of  all  others  has  had  the  most  far-reaching  results  is 
number  eight.  It  is  not  found  in  the  original  charter,  but  in 
that  section  there  was  planted  the  seed  of  that  mighty  system 
of  insurance  supervision  which  dominates  the  business  not  only 
in  Massachusetts,  but  throughout  the  land;  and  whenever  some 
one  asks  for  the  beginning  of  insurance  supervision  in  Massa- 
chusetts, tell  him  February  13,  1799." 

Insurance  Charters  of  Limited  Duration. 

The  charter  of  the  Boston  Marine  Insurance  Company  has 
not  been  preserved  in  its  entirety  and  there  is  some  doubt  as 
to  whether  the  same  contained  the  important  provision  of  Sec.  8 
of  the  charter  of  the  Massachusetts  Fire  and  Marine.  The  Com- 
pany's charter,  however,  was  also  limited  to  twenty  years.  An 
early  announcement  of  the  business  to  be  transacted  makes  it 
evident  that  the  term  "marine  insurance"  was  construed  in  a 
broad  manner,  for  it  is  said,  "  The  President  and  Directors 
of  said  Company  are  now  ready  to  receive  proposals  (at  their 
Office  in  State-street,  Boston,  lately  occupied  by  the  Branch 
Bank)  and  to  make  insurance  upon  Vessels,  Freight,  and  Goods; 
and  against  captivity  of  persons;  and  on  the  life  of  any  person 
during  his  absence  by  sea;  and  in  cases  of  money  lent  upon 
bottomry,  and  respondentia;  not  exceeding  thirty  thousand 
dollars,  on  any  one  risque." 

After  these  charters  had  been  granted  many  similar  cor- 
porations came  into  existence,  but  no  new  principles  of  law  or 
legislation  may  be  said  to  have  been  developed  additional 
to  those  stated  to  have  been  expressly  set  forth  in  the  early 
charters  of  the  Philadelphia  and  Boston  companies.  The 
chartered  companies  soon  proved  their  superiority  over  the 
early  forms  of  individual  underwriting,  which  gradually  fell 
into  disuse  and  finally  passed  away,  as  no  longer  adapted  to  the 
more    complex    commercial    conditions   of    the    present  time. 

189 


origin  and  growth  op  law  and  legislation 

First  Act  of  Congress  on  Insurance  (1797). 

The  earliest  mention  of  insurance  legislation  by  the  U.  S. 
Congress  occurs  in  the  Lex  Mercatoria  Americana,  by  George 
Caines,  published  in  1802.  It  is  said  in  this  work  that  **  Neither 
by  the  acts  of  Congress,  nor  those  of  the  different  state  legis- 
latures, are  there  any  positive  regulations  of  the  formal  parts 
of  the  instrument  of  insurance:  but  custom  has  shown  what 
they  ought  to  be;  and,  in  what  appertains  to  trade,  let  it  be 
constantly  remembered,  that  custom  alone  is  a  law."  Congress 
had,  however,  as  early  as  1797,  passed  a  stamp  act  conforming 
in  its  essentials  to  the  stamp  duties  imposed  by  the  stamp  act 
of  1765.  In  referring  to  this  act  in  a  discussion  of  the  necessary 
formalities  required  for  the  lawful  completion  of  the  insurance 
contract,  Caines  remarks  that  **  the  proper  stamp  constitutes 
with  us,  the  last  requisite;  and  without  it,  the  policy  is  not  only 
void,  but  unless  made  out  and  duly  stamped  within  three  days 
after  the  insurance,  induces  a  forfeiture  from  the  insurer  of 
$20  for  every  offense."  The  stamp  duty  referred  to  was  enacted 
at  the  first  session  of  the  fifth  congress  (Chap.  II,  sec.  4)  on 
July  6,  1797,  and  the  act  reads  in  part  as  follows: 

"From  and  after  the  31st  day  of  December  next  there 
shall  be  levied,  collected  and  paid  through  the  United  States 

the  several  stamp  duties  following,  to  wit:      any 

policy  of  insurance  or  instrument  in  the  nature  thereof,  whereby 
any  ship"^,  vessels  or  goods,  going  from  one  district  to  another 
in  the  United  States,  or  from  the  United  States  to  any  foreign 
port  or  place,  shall  be  insured,  to  wit;  if  going  from  one  district 
to  another  in  the  United  States,  25  cents;  if  going  from  the 
United  States  to  any  foreign  port  or  place,  when  the  sum  for 
which  the  insurance  is  made  shall  not  exceed  $500,  25  cents; 

and  when  the  sum  insured  shall  exceed  $500,  $1.00 

Any  certificate  of  a  share  in  any  insurance  company  or  any 
certificate  of  a  share  in  the  Bank  of  the  United  States,  or  of 
any  State  or  other  bank,  above  $20,  and  not  exceeding  $100, 
10  cents;  above  $100,  25  cents;  and  for  any  certificate  for  every 
such  share  under  $20  at  the  rate  of  10  cents  for  $100,  etc." 

"  Section  3  of  this  Act  provided,  "And,  be  it  further  enacted, 
that  all  deeds  and  writings  whatsoever,  or  the  payment  of  any 

190 


ORIGIN   AND   GROWTH   OP  LAW   AND   LEGISLATION 

sum  of  money,  upon  the  contingency  of  the  loss  of  any  ship, 
or  goods,  laden  or  to  be  laden  on  board  of  any  ship,  or  of  dam- 
age thereto,  within  this  Act  chargeable  with  the  several  rates 
of  duty  hereinafter  mentioned.* 

Power  op  Congress  to  Supervise  and  Control. 

There  are  a  number  of  additional  references  to  insurance, 
penalties,  etc.,  in  the  act,  but  the  most  important  of  these  is 
section  9,  which,  by  implication  at  least,  suggests  the  power 
of  congress  to  supervise  insurance  companies  and  which  reads: 

"And,  be  it  further  enacted,  that  the  several  duties  afore- 
said shall  be  levied,  collected,  received  and  accounted  for, 
by  and  under  the  immediate  direction  and  management  of  the 
supervisors  and  inspectors  of  the  Revenue  and  other  officers 
of  inspection,  subject  to  the  Superintendent's  control  and  the 
direction  of  the  Treasury  Department,  according  to  the  respec- 
tive authorities  and  duties  of  the  officers  thereof." 

The  act  was  limited  to  a  duration  of  five  years,  but  the 
exact  date  of  repeal  is  somewhat  doubtful.  It  is  quite  probable 
that  the  duties  were  continued  in  force  by  subsequent  acts 
providing  for  a  general  stamp  office,  dated  March  3,  1801 
(Chap.  XIX)  and  August  2,  1813  (Chap.  LIII).  No  reference 
to  the  act  of  1797  occurs  in  any  of  the  writings  on  American 
insurance  law  and  legislation,  and  the  same  seems  to  have 
escaped  entirely  the  learned  commentators,  nor  is  there  any 
reference  thereto  in  the  debates  of  congress  leading  to  the 
enactment  of  the  stamp  duties  imposed  upon  insurance  com- 
panies during  the  Civil  War. 

Development  and  Growth  op  American  Insurance  Law. 

Near  the  close  of  the  i8th  Century  the  business  of  insur- 
ance in  the  United  States  was  still  of  very  small  extent  and 
practically  limited  to  the  large  seaports  of  the  North  Atlantic 
coast.  Gradually,  however,  the  practice  of  American  under- 
writing assumed  a  definite  character  of  its  own  and  the  in- 
creasing number  of  chartered  corporations  for  the  transaction 
of  an  insurance  business  naturally  directed  attention  to  the 

191 


ORIGIN   AND   GROWTH   OP   LAW   AND   LEGISLATION 

state  of  the  law  and  the  required  special  legislation.  The 
decisions  of  Lord  Mansfield  governed  in  most  of  the  early- 
cases  and  Park's  classical  treatise  on  the  Law  of  Insurance,  first 
published  in  London  in  1786,  had  been  issued  in  several  Amer- 
ican editions  by  18 10,  when  the  great  work  on  Insurance  Law 
by  Samuel  Marshall  came  out  in  an  American  edition  by  Condy, 
considered  by  most  of  the  writers  on  the  subject  of  superior 
merit  to  the  original,  first  published  in  London  in  1786.  The 
early  development  of  American  insurance  law  may  be  traced 
in  the  various  American  cases  cited  by  Kent  in  his  Commen- 
taries, first  published  in  1826,  but  one  of  the  most  suggestive 
occurrences  was  the  veto  of  the  Council  of  Revision  of  the 
State  of  New  York,  under  date  of  April  6th,  1807.  A  bill  had 
been  introduced  entitled  "An  Act  to  restrain  insurance  of 
lottery  tickets  and  for  other  purposes"  and  after  having  been 
referred  to  the  Council  of  Revision  (long  since  abolished)  the 
following  objection  was  made  by  Kent,  Chief  Justice,  on  the 
ground  that  the  bill  was  inconsistent  with  the  public  good  and 
the  Constitution,  because  by  its  last  section  the  bill  declared  "it 
to  be  unlawful  for  any  company  not  incorporated  by  the  laws 
of  this  State,  or  of  the  United  States,  or  any  private  individual 
not  residing  within  this  State,  to  set  up  and  keep  within  this 
State,  by  their  agent,  or  otherwise,  any  office  to  insure  houses 
or  goods  against  fire,  or  vessels  or  merchandise  against  mari- 
time losses,  and  that  every  such  insurance  shall  be  void,  and 
every  person  receiving  any  premium  therefor  shall  forfeit  double 
the  amount  thereof."  The  Chief  Justice  argued  that  "This 
provision  is  inconsistent  with  the  second  section  of  the  fourth 
article  of  the  Constitution  of  the  United  States,  which  declares 
that  '  the  citizens  of  each  State  shall  be  entitled  to  all  privileges 
and  immunities  of  citizens  in  the  several  States.*  This  inter- 
community of  privilege  secured  to  the  citizens  of  the  several 
States  applies  to  their  personal  rights  and  immunities,  and  among 
others,  to  the  free  right  to  exercise  trade  and  commerce."* 

*  The  question  involved  in  this  controversy  is  quite  fully  discussed 
in  the  Special  Message  of  Gov.  Morgan  Lewis,  in  1807,  printed  in  full 

192 


origin  and  growth  op  law  and  legislation 

Freedom  of  Trade  and  Contract  in  Insurance. 

In  continuation,  upon  the  general  merits  of  the  bill,  Kent 
pointed  out  that,  "The  bill  is  repugnant  to  the  general  good, 
A  contract  of  insurance,  when  founded  on  a  substantial  interest, 
and  not  perverted  to  gambling  purposes,  is  one  of  the  most 
useful  species  of  contracts  which  arises  in  the  whole  course  of 
commercial  transactions.  It  ought  to  be  left  freely  to  be  made, 
and  not  placed  under  the  restrictions  of  a  monopoly.  If  a 
company  or  an  individual  in  another  State  will  insure  upon 
more  reasonable  terms,  or  possesses  a  sounder  credit,  or  a  more 
prompt  disposition  to  adjust  losses  than  any  with  us,  why 
should  a  citizen  of  this  State  be  denied  the  privilege  of  obtain- 
ing such  insurance?  And  if  his  privilege  to  do  so  is  admitted 
to  be  entire  and  perfect,  why  should  a  legal  embarrassment 
be  thrown  in  his  w^ay  by  prohibiting  such  insurances  through 
the  means  of  an  agent  here?  It  is  a  plain  and  most  convenient 
rule  of  law,  that  all  contracts  are  equally  valid  when  made  by 
an  authorized  agent  as  when  made  by  his  principal;  and  this 
rule  ought  not  to  be  set  aside,  without  some  important  object 
which  is  cogent  in  its  reason  and  general  in  its  application." 

It  is  a  remarkable  fact  that  this  extremely  suggestive 
opinion,  in  favor  of  free  intercourse  between  the  states  in  mat- 
ters of  insurance  as  an  element  of  commerce  should  never  have 
been  referred  to  by  anyone  who  has  written  on  the  subject. 

Retaliatory  Legislation  and  Interstate  Conflict. 

The  subsequent  history  of  this  effort  is  rather  obscure. 
A  similar  law  had  been  passed  in  Pennsylvania  and  in  1829 
the  Legislature  of  New  York  prohibited  marine  insurance,  or 
lending  on  respondentia  or  bottomry,  effected  within  the  State 
"to  all  persons  and  companies  residing  in  any  foreign  coimtry 
acting  by  an  agent  here."  According  to  Kent,  "Persons  and 
associations  in  other  States  effecting  such  insurance  in   New 

in  Vol.  I  of  the  "  Messages  from  the  Governors,"  re-published  by  author- 
ity of  the  State  of  New  York,  Albany,  1909,  p.  613. 

193 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

York  were  taxed  ten  per  cent,  on  their  premium"  and  the 
same  check  or  prohibition  applied  to  insurance  against  fire  in 
New  York.  Thus  the  doctrine  of  prohibitory,  retahatory,  or 
discriminating  legislation  on  insurance,  first  enunciated  by 
Count  Phillip  of  Burgundy  in  1458  is  even  in  this  country 
over  eighty  years  old  at  the  present  time.  Kent,  however, 
remarked  with  regard  to  Massachusetts  in  this  respect,  that 
the  law  in  that  State  was  "more  liberal  and  it  allows,  by  the 
Act  of  18 16,  corporate  insurance  companies  in  other  States 
and  in  foreign  countries  to  insure  by  their  agents  upon  com- 
pliance with  certain  conditions  intended  to  guard  against  abuse." 
Legislation  of  this  kind  naturally  increased  with  the  growth 
of  the  business  and  new  laws  were  called  for  by  the  separate 
organization  of  life  insurance  companies  of  which  the  first  were 
the  Pennsylvania  Ins.  Co.  for  the  Insurance  of  Lives,  estab- 
lished in  1 8 14,  and  the  second  the  Massachusetts  Hospital, 
established  in  18 18.  Of  these  two  interesting  institutions  no 
full  historical  account  has  been  preserved,  but  it  may  be  stated 
as  a  fact  that  from  the  beginning  they  werQ  the  subject  of 
special  solicitude  on  the  part  of  the  States  from  which  they 
derived  their  charters  as  moneyed  corporations  accumulating 
large  funds  upon  long  deferred  contractual  obligations. 

Gradual  Increase  in  State  Legislation. 

The  principle  of  accountability  had  been  laid  down  in  the 
charter  of  the  Massachusetts  Fire  and  Marine  in  1796.  Charters 
were  not  easily  granted  and  as  early  as  1823  a  memorial  was 
presented  to  the  New  York  Legislature  praying  for  the  incor- 
poration of  an  insurance  company,  which  had  evidently  failed 
to  secure  a  charter  at  a  previous  session  of  the  Legislature. 
The  business  was  rapidly  growing  and  in  1825  a  "Statement" 
was  published  of  "all  insurance  companies  in  the  State  with 
the  amount  of  capital  stock  authorized  and  amount  actually 
paid  in,  amount  of  tax  assessed  stock,  etc.,"  followed  in  the 
same  year  by  a  "report"  upon  supposed  violation  of  their 
charters  by  certain  insurance  companies,  and  a  report  of  the 

194 


ORIGIN   AND   GROWTH   OP   LAW   AND   LEGISLATION 

Attorney-General  on  ''questions  affecting  the  right  of  the 
Legislature  to  alter,  modify,  or  amend  any  act  incorporating 
an  insurance  company."  There  was  a  further  report  this  ses- 
sion of  a  select  committee  on  the  subject  of  banks  and  insur- 
ance companies,  all  of  which  may  be  considered  proof  that 
the  business  of  insurance,  at  a  time  when  by  modern  standards 
only  a  limited  amount  was  actually  done,  was  considered  semi- 
public  in  character  and  fully  within  the  supervising  and  regu- 
lating powers  of  the  State  Legislature. 

Required  Publicity  and  Statistical  Returns. 

In  1827  the  Comptroller  of  the  State  of  New  York  made 
a  report  on  the  capital  employed  in  banking,  insurance  and 
manufacturing  companies  in  the  State  and  the  amount  of  tax 
assessed  upon  the  same  and  from  1830  onward  annual  returns 
were  required  of  all  insurance  companies  chartered  by  the 
State,  until  the  year  i860  when  an  insurance  department  was 
established  with  full  power  of  supervision  and  control. 

Growth  of  the  Insurance  Business. 

The  evolution  of  insurance  law  and  legislation  in  other 
states  has  been  much  the  same.  Out  of  crude  beginnings  a 
most  elaborate  system  of  supervision  and  control  has  slowly 
developed,  until  a  point  has  been  reached  when  a  large  part  of 
the  business,  particularly  the  life  branch,  has  practically  become 
public  in  character,  with  a  more  or  less  implied  guarantee  on 
the  part  of  the  State  for  company  solvency  and  guarantee  of 
good  faith.  Most  of  the  early  chartered  companies  were  out 
of  existence  fifty  years  after.  A  return  prepared  in  1861  showed 
that  out  of  336  insurance  corporations  chartered  by  that  year 
only  114  were  still  in  existence.  Of  23  companies  chartered 
before  181  o  only  one  remained  active  in  1861.  The  Massachu- 
setts Fire  and  Marine,  established  with  so  much  difficulty  in 
1795  had  its  charter  revoked  in  1848.  The  rapid  rise  of  the 
whale  fishery  in  Nantucket  accounts  for  the  establishment  of 
the  Nantucket  Ins.  Co.  under  date  of  June  21,  1804,  and  of  the 

IPS 


ORIGIN   AND   GROWTH    OF   LAW   AND   LEGISLATION 

Phoenix  Ins.  Co.  of  Nantucket  under  date  of  June  12,  18 18. 
The  first  named  ceased  to  do  business  in  1832  and  the  second 
in  1838.  How  the  Boston  Fire  and  Marine,  estabHshed  in  1799, 
came  to  an  end  is  not  officially  known.  The  Newburyport 
Fire  and  Marine,  established  in  1799  came  to  an  end  in  1832, 
and  the  Salem  Marine,  established  in  1800,  ceased  business  in 
1839.  All  of  these  cases  illustrate  the  difficulty  of  success  in 
insurance  enterprise.  The  rise  of  commerce  gave  birth  to  many 
of  these  institutions  and  the  decline  ended  their  career.  In  no 
case  is  this  better  illustrated  than  in  that  the  two  Nantucket 
companies,  which  flourished  with  the  whale  fishery  and  ended 
with  the  decay  of  that  remarkable  industry  in  one  of  the  his- 
torically most  interesting  localities  in  America. 

Massachusetts  Requirements  op  1807. 

The  first  statutory  requirement  of  Massachusetts  on  the 
subject  of  insurance  appears  to  have  been  a  Resolve  of  1807 
under  which  insurance  companies  were  to  render  an  account  of 
their  affairs  to  the  next  General  Court.  This  Act  called  for  a 
statement  of  capital  paid  in,  the  character  and  amount  of 
the  funds  in  which  the  same  was  invested  and  the  amount 
of  outstanding  risk — in  other  words,  all  the  essential  facts 
disclosing  the  business  transacted  by  the  companies.  A  con- 
solidated account  of  the  returns  required  under  this  Act  and 
made  from  1816  to  1866  was  published  in  the  insurance  report 
for  that  year.  In  181 8  an  Act  was  passed  defining  **the  power, 
duties  and  restrictions,  of  insurance  companies."  This  was 
probably  the  first  general  law  on  the  subject  of  insurance  enacted 
in  the  State  of  Massachusetts,  but  the  Act  would  seem  to  have 
applied  only  to  the  companies  transacting  a  marine  insurance 
business.  The  Act  provided  in  part  that  ''All  Insurance  Com- 
panies which  shall  hereafter  be  incorporated  under  the  author- 
ity of  this  commonwealth  shall  have  power  and  authority  to 
make  insurance  on  vessels,  freight,  money,  goods  and  effects 
and  against  captivity  of  persons  and  on  the  life  of  any  person 
during  his  absence  at  sea  and  in  case  of  money  lent  upon  bot- 

196 


ORIGIN   AND   GROWTH^OP   LAW   AND   LEGISLATION 

tomry  and  respondentia  and  to  fix  the  premium  and  terms 
of  payment."  * 

It  was  further  provided  that  **such  companies  shall 

publish  in  two  newspapers  printed  within  this  commonwealth, 
one  of  which  at  least  shall  be  in  the  town  of  Boston,  the  amount 
of  their  stock,  against  what  risk  they  desire  to  insure,  and  the 
largest  sum  they  mean  to  take  on  any  one  risk."  Other  pro- 
visions of  the  Act  required  them,  whenever  directed  by  the 
Legislature,  to  submit  statements  of  their  company  affairs  to 
that  body  and  to  be  examined  concerning  them  under  oath; 
also  forbidding  them  to  write  on  any  one  risk  a  sum  exceeding 
io%  of  the  capital  stock  of  their  respective  company.  In 
other  w^ords,  the  modem  theory  of  supervision,  examination, 
control  and  publicity  was  fully  developed  in  all  its  essentials 
nearly  one  hundred  years  ago  and  the  Massachusetts  Act  of 
1818  merely  carried  into  effect  the  principle  of  visitorial  power 
included  in  the  amended  charter  of  the  Massachusetts  Fire 
and  Marine  Ins.  Co.  of  1795. 

First  Law  on  Fire  Insurance  in  Massachusetts. 

In  1820  an  act  was  passed  in  Massachusetts  granting  spe- 
cific authority  to  the  several  insurance  companies  in  the  State 
to  insure  against  fire,  which  was  the  first  general  law  on  the  sub- 
ject of  fire  insurance,  such  authority  having,  up  to  that  time, 
been  granted  only  by  specific  charter.  The  most  significant 
phrase  in  the  wording  of  this  act  is  that  authority  is  granted 

to  the  companies  to  make  insurance  against  fire 

upon  property  within  the  United  States.''  It  would  seem  at 
least  that  State  boundaries  were  not  considered  a  hindrance  to 
the  widest  development  of  the  insurance  business  at  this  time 

Legislation  Concerning  Dividends  and  Annual  Returns. 

In  1836  a  report  was  made  to  the  Massachusetts  Legisla- 
ture on  the  regulation  of  time  of  paying  insurance  dividends. 
In  1837  a  report  was  made  favoring  annual  returns  of  insurance 

*2istMass.  Ins.   Rep.,  p.  201. 

197 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

companies  with  power  to  enforce  this  requirement.  Insurance 
supervision,  properly  to  be  so  called,  may,  therefore,  be  said  to 
date  from  this  year  and  between  1839  and  1866  statistical 
returns  were  made,  which  afforded  a  fairly  complete  view  of 
the  business  of  the  companies  during  this  period.  That  the  re- 
turns were  more  or  less  objectionable  to  some  of  the  companies 
is  made  evident  by  a  petition  presented  to  the  Legislature  in 
1847  "against  laws  requiring  insurance  companies  to  make 
annual  returns  of  transactions,"  followed  in  1848  by  a  remon- 
strance signed  by  C.  W.  Cartwright  against  the  injustice  of  re- 
quiring insurance  companies  to  make  annual  returns.  More  was 
apparently  demanded  of  local  institutions  than  of  the  companies 
of  other  states,  for  in  1854  a  petition  was  presented  to  the  Leg- 
islature asking  that  foreign  insurance  companies  should  make 
as  full  returns  to  the  State  as  State  companies.  In  1856  a  pro- 
test was  made  to  the  Legislature  against  insufficient  insurance 
capital  in  the  State  to  meet  wants  of  commerce,  followed  by  a 
recommendation  that  the  Legislature  charter  one  or  two  respon- 
sible marine  insurance  companies  with  large  capital  to  relieve 
requirements. 

Establishment  op  First  State  Insurance  Department. 

An  Act  had  been  passed  in  1852  under  which  the  Secretary, 
the  Treasurer,  and  the  Auditor  of  the  State,  were  constituted  a 
Board  of  Insurance  Commissioners,  charged  with  certain  lim- 
ited duties,  and  this  office  was  continued  under  the  codified 
statute  of  1854,  but  it  was  not  until  the  year  following  that  a 
regularly  organized  and  equipped  Insurance  Department  was 
established,  also,  however,  with  the  title  "Board  of  Insurance 
Commissioners — the  Board  consisting  of  three  members,  ap- 
pointed by  the  Governor  with  advice  of  his  council.  The  Act 
is  quite  an  elaborate  document  of  ten  sections.  The  Act  pro- 
vided, inter  alia,  that  "The  said  Commissioners,  or  any  two  of 
them,  at  least  once  in  every  two  years  and  as  much  oftener 
as  they  may  deem  expedient  shall  visit  every  insurance  company, 
of  whatever  description,  which  has  been  or  may  hereafter  be 


ORIGIN    AND    GROWTH   OF   LAW   AND   LEGISLATION 

incorporated  by  authority  of  this  commonwealth  and  shall 
have  free  access  to  their  books  and  papers  and  shall  thoroughly 
inspect  and  examine  into  all  the  affairs  of  said  companies  and 
make  any  and  all  such  inquiries  as  may  be  necessary  to  ascer- 
tain the  condition  of  said  corporations  and  their  ability  to 
fulfill  all  the  engagements  made  by  them  and  whether  they 
have  complied  with  the  provisions  of  law  applicable  to  their 
transactions,"  etc.,  etc. 

By  this  Act  the  modem  American  system  of  State  super- 
vision came  into  existence  in  the  year  1855,  and  to  Massa- 
chusetts in  this,  and  in  so  many  other  legislative  reforms,  belongs 
the  credit  of  having  made  the  best  possible  beginning  so  that 
other  states  could  safely  follow.  Historical  accuracy  requires 
that  mention  should  be  made  of  the  appointment  of  Insurance 
Commissioners  by  the  Governor  of  New  Hampshire  as  early 
as  1850  and  the  publication  of  abstracts  of  returns  for  the  two 
years  ending  with  1851,  followed  by  the  publication  of  annual 
reports  from  1852  onward  to  date.  The  first  annual  report  of 
the  Massachusetts  Department  was  not  published  until  1855, 
but  it  is  to  Massachusetts  that  the  nation  is  indebted  for  the 
modem  system  of  State  supervision,  and  not  to  New  Hamp- 
shire. 

Development  of  the  State  Supervisory  Function. 

In  some  of  the  states,  the  Auditor,  State  Treasurer,  or  some 
other  fiduciary  officer  has  been  charged  with  general  super- 
visory power,  previous  to  the  establishment  of  regularly  organ- 
ized special  departments.  In  Vermont,  the  Secretary  of  State 
and  the  State  Treasurer  have  been  Insurance  Commissioners 
since  1852.  New  York  established  an  insurance  department  in 
i860,  and  Connecticut  and  Indiana  in  1865.  California  fol- 
lowed in  1868  and  Missouri  in  1869.  In  that  year  the  Insurance 
Commissioner  of  New  York  could  say  in  his  annual  report  that 
"Government  supervision  of  insurance  companies  is  now  an 
established  feature  in  State  government — New  York,  Massachu- 
setts, California  and  Missouri  have  separate  officers  and  distinct 

199 


ORIGIN    AND   GROWTH   OP  LAW    AND   LEGISLATION 

departments  of  their  executive  government  organized  especially 
for  this  purpose."  In  1870  many  more  states  followed  and  to- 
day every  state  and  territory  has  a  more  or  less  completely 
organized  department  for  the  supervision  and  control  of  in- 
surance orporations. 

OvER-LeGISLATION   AND   INTERSTATE   ChAOS. 

The  growth  of  the  principle  of  State  duty  and  responsi- 
dility  in  determining  and  maintaining  the  contractual  rela- 
tions of  parties  to  the  insurance  contract  and  the  safe,  sound 
and  proper  administration  of  insurance  corporations  has  natur- 
ally been  of  a  most  varied  character  in  the  different  states,  and 
within  the  last  generation  an  immense  mass  of  legislation  on  in- 
surance has  been  enacted,  much  of  which  is  conflicting,  contra- 
bictory  and  uncalled  for.  The  amount  of  law  and  legislation 
no  the  subject  of  insurance  has  been  so  considerable,  partic- 
ularly during  recent  years  that  no  summary  account  would  do 
the  matter  justice.  The  simple  but  effective  statutes  of  an 
earlier  day,  when  the  business  was  small  and  the  companies 
few,  have  been  replaced  by  drastic  regulating  statutes,  which 
in  some  cases  amount  to  state  management  and  practically 
make  the  State  responsible  for  the  final  outcome  of  much  of 
what  is  called  insurance  companies,  experience.  The  states 
to-day  fix  all  the  fundamental  conditions  upon  which  at  least 
the  life  branch  of  the  business  is  conducted,  the  rate  of  mortal- 
ity, the  rate  of  interest  and  even  the  expense  rate.  The  State 
upon  this  assumption  of  arbitrary  authority  commits  itself 
to  the  doctrine  of  state  responsibility  with  all  that  is  involved 
in  that  doctrine  considering  the  magnitude  and  growth  of 
the  business  and  its  probable  much  greater  magnitude  in  the 
future.  Of  insurance  corporations,  however,  it  is  true,  as  of 
all  state  chartered  corporations,  that  what  the  State  has  cre- 
ated the  State  may  destroy.  As  well  said  by  Davis,  in  his 
treatise  on  the  origin  and  development  of  modern  corpora- 
tions, "  The  great  fact  of  the  history  of  the  old  corporations 
is  that  the  state  has  wholly  or  partially  absorbed  their  powers. 


ORIGIN   AND  GROWTH   OP   LAW   AND   LEGISLATION 

To  such  extent  as  the  social  activity  of  the  surviving  corpo- 
rations has  been  supplemented  in  response  to  greater  public 
demands,  it  has  been  done  almost  entirely  through  the  medium 
of  new  institutions,  created,  maintained  and  administered 
by  the  State,  and  not  through  new  corporations.  The  absorp- 
tion of  the  powers  of  a  corporation  by  the  State  does  not  imply 
merely  the  resumption  of  powers  previously  granted  by  it; 
some  of  the  powers  may  have  been  inoperative,  when  granted 
from  lack  of  subject-matter  on  which  to  have  effect;  on  the  other 
hand,  it  does  not  follow  from  the  absorption  of  corporate  powers 
by  the  state  that  the  state  continues  to  exercise  them  as  the 
corporation  has  previously  done;  they  may  be  allowed  by  the 
state  to  lie  dormant  under  the  influence  ot  political  theories 
repugnant  to  their  exercise,"  and  in  continuation,  "As  an  in- 
dustry becomes  more  public  in  character,  it  is  elevated  in  pop- 
ular estimation  above  the  owners  of  it  and  in  a  sense  is  separated 
from  them, — it  is  idealized  or  personified.  It  appears  to  have 
rights  and  duties  in  itself,  distinct  from  those  of  its  owners. 
Is  that  not  the  same  movement  that  resulted  (in  a  somewhat 
different  field)  in  the  development  of  the  legal  conception  of 
the  "ideal  personality"  of  municipalities?  The  law  regards  the 
capital  invested  in  it  as  "clothed  with  a  public  trust,"  by  virtue 
of  which  its  owners  have  only  a  limited  control  of  it ;  its  patrons  are 
regarded  as  entitled  by  law  to  the  benefit  of  its  services  in 
return  for  a  reasonable  compensation.  It  is  the  increased 
dependence  of  men  on  physical  things,  grouped  in  great  units 
such  as  systems  of  railway,  telegraph  and  water  works,  that 
has  contributed  in  a  large  measure  to  the  growth  of  corpora- 
tions." And  finally,  by  the  same  writer,  "It  is  beginning  to 
be  recognized  that  more  government  is  necessary  under  the 
developed  conditions  now  attained  by  society  than  under  the 
comparatively  simple  conditions  prevalent  a  century  ago, — 
and  that  such  increased  government  has  actually  been  provided, 
not  by  the  state  but  by  corporations.  The  plain  tendency  to 
corporate  life  at  present,  in  its  relations  to  the  state,  is  in  the 
direction   of   subjection   and   submission   to   close   supervision. 

20I 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

In  history  the  state  has  never  been  satisfied  with  the  mere 
supervision  of  corporations  by  commissions  or  otherwise; 
it  would  be  against  the  teachings  of  history  to  expect  that 
now  the  state  will  stop  short  of  the  complete  absorption  of  the 
governmental  features  of  corporations." 

Conflict  of  Law  and  Need  of  Uniform  Legislation. 

The  common  law  of  insurance  in  America  to-day  is  practi- 
cally what  it  has  always  been  and  the  doctrine  of  insurable 
interest  governs  still  with  the  same  force  as  when  the  gambHng 
acts  were  first  passed  in  1754  and  in  1774.  It  has  been  estimated 
that  over  30,000  American  insurance  decisions*  have  been  ren- 
dered by  the  courts  and  that  12,000  of  these  have  been  fought 
clear  through  to  the  highest  tribunal  during  the  last  twenty 
years  alone.  According  to  the  Legislative  Index  over  1,200 
specific  laws  pertaining  to  the  business  of  insurance  were 
enacted  during  the  nine  years  ending  with  1908  and,  according 
to  the  Hon.  John  F.  Dry  den,  the  present  statutory  requirements 
on  the  subject  of  insurance  would  constitute  a  volume  of  over 
five  thousand  printed  pages.  Early  law  and  legislation  on 
insurance  has  been  forgotten,  but  the  principles  remain  the 
same.  Early  law  governed  in  all  the  essentials  and  left  sufficient 
contractual  corporate  freedom  to  conduct  the  business  in  har- 
mony with  the  law  of  social  and  economic  development  or 
growth.  Out  of  the  common  law  doctrine  that  insurance  con- 
tracts shall  not  be  contrary  to  public  policy  and  that  the  rights 
of  the  respective  parties  shall  be  fully  protected  by  the  courts 
has  slowly  developed  the  modem  doctrine  of  state  supervision 
and  control  over  insurance  contracts  and  insurance  corporations. 
The  future  of  the  business  may  be  viewed  in  the  past.  There 
will  not  be  less  regulation  but  more,  not  less  visitorial  power 
of  departments  but  more,  not  less  publicity  of  facts  and  expe- 
rience but  more,  until  the  corporations  will  serve,  as  completely 
as  the  nature  of  the  business  permits,  the  higher  purposes 
and  needs  of  the  state. 

*  Law  of    Insurance,  by  Geo.  Richards,  3d  Ed.,  N.  Y.,  1909,  p.  xi. 

202 


origin  and  growth  of  law  and  legislation 

Insurance  as  a  Branch  op  Legal  Science. 

A  whole  century  has  passed  since  the  first  American  insur- 
ance corporation  came  into  existence,  and  not  only  has  there 
been  an  enormous  increase  in  the  extent  of  the  business  itself, 
but  an  immense  addition  has  been  made  to  the  law  of  the 
subject.  Willard  Phillips  was  the  first  to  publish  a  complete 
treatise  on  the  law  of  insurance  as  based  upon  American  ex- 
perience, and  the  value  of  the  work  is  indicated  by  the  fact 
that  a  second  edition  was  published  in  1834  and  a  new  two- 
volume  edition  in  1840.  In  a  brief  preface  to  the  first  edition 
Phillips  assigned  to  insurance  its  proper  place  as  a  science  in 
the  remark  that  **No  branch  of  law  can  more  properly  be  de- 
nominated a  science,  than  insurance;  and  since  this  contract 
is  substantially  the  same  in  different  countries,  and  continues 
to  be  the  same  now  that  it  was  formerly,  the  decisions  of  courts, 
whether  ancient  or  modem,  and  the  opinions  and  reasonings 
of  writers,  whether  American,  English,  Italian,  or  French, 
are  equally  applicable  to  it." 

Kent's  Commentaries  on  Insurance  as  a  Branch  op 
Commercial  Jurisprudence. 

No  one,  however,  did  more  to  raise  the  dignity  of  insurance 
law  to  a  separate  branch  of  legal  science  than  James  Kent, 
who,  in  his  Commentaries,  first  issued  in  1826,  gave  painstaking 
attention  to  every  branch  of  the  business,  with  a  full  account 
of  the  ancient  foundations  of  insurance  contractual  law.  He 
traced,  in  particular,  the  connection  between  the  insurance 
law  of  England  and  the  American  Colonies  to  the  early  law  and 
practice  after  the  peace  of  1783,  holding  that  "During  the 
colonial  government  of  this  country,  as  well  as  for  the  first 
fifteen  or  twenty  years  after  the  peace  of  1783,  the  business  of 
insurance  was  almost  entirely  carried  on  by  private  individuals, 
each  taking  singly  for  himself,  and  not  in  solido,  a  risk  to  the 
amount  of  his  subscription.  But  incorporated  companies 
began  to  multiply  and  supplant  private  underwriters,  and 
the  business  of  insurance  in  the  United  States  is  now  carried 

203 


ORIGIN   AND   GROWTH   OP   LAW   AND   LEGISLATION 

on  almost  exclusively  by  incorporated  companies."  Points 
of  divergence  are  carefully  pointed  out  and  emphasized  by 
moral  reflections,  which  may  well  be  read  to  advantage  even 
at  the  present  day.  Thus,  in  regard  to  insurance  as  an  aid 
to  illicit  trade,  Kent  pointed  out,  "It  is  certainly  matter  of 
surprise  and  regret,  that  in  such  countries  as  France,  England, 
and  the  United  States,  distinguished  for  a  correct  and  en- 
lightened administration  of  justice,  smuggling  voyages,  made 
on  purpose  to  elude  the  laws,  and  seduce  the  subjects  of  foreign 
states,  should  be  countenanced,  and  even  encouraged  by  the 
courts  of  justice.  The  principle  does  no  credit  to  the  commer- 
cial jurisprudence  of  the  age." 

Utility  of  Insurance  to  Commerce  and  Navigation. 

This  reference  to  insurance  as  an  element  of  commerce 
was  not  accidental,  for  in  many  other  parts  of  the  Commentaries 
Kent  re-emphasized  the  commercial  aspect  of  insurance  trans- 
actions. The  following  suggestive  statement  is  sufficient  to  prove 
conclusively  that  in  the  mind  of  this,  the  foremost  commen- 
tator on  American  law,  the  insurance  contract  and  the  insurance 
business  were  not  to  be  considered  separate  and  distinct  from 
commercial  law  and  legislation  generally.  "  The  business  of 
uncovered  navigation  or  trade  would  be  spiritless  or  presump- 
tuous. The  contract  of  insurance  protects,  enlarges,  and  stimu- 
lates maritime  commerce;  and  under  its  patronage,  and  with  the 
stable  security  which  it  affords,  commerce  is  conducted  with 
immense  means  and  unparalleled  enterprise,  over  every  sea,  and 
to  the  shores  of  every  country,  civilized  and  barbarous.  Insurers 
are  societies  of  capitalists,  who  are  called  by  their  business  to 
study  with  profound  sagacity,  and  with  exactness  of  calculation, 
the  geography  and  navigation  of  the  globe,  the  laws  of  the  ele- 
ments, the  ordinances  of  trade,  the  principles  of  international 
law,  and  the  customs,  products,  character,  and  institutions  of 
every  country  where  tide  waters  roll,  or  to  which  winds  can 
waft  the  flag  of  their  nation," 

204 


origin  and  growth  of  law  and  legislation 

Principlbs  of  Ancient  Law  in  Modern  Legislation. 
Every  writer  of  authority  on  the  subject  of  insurance 
previous  to  the  decision  of  Paul  vs.  Virginia  by  the  United 
States  Supreme  Court,  that  insurance  policies  are  not  articles 
of  commerce  within  the  meaning  of  the  commerce  clause  of  the 
Constitution,  has  emphasized  the  importance  of  insurance  as 
an  element  of  commerce  and  maritime  navigation.  Some  of 
the  most  important  principles  of  ancient  insurance  law  have 
been  incorporated  into  American  law,  and,  for  illustration, 
a  rule  from  Le  Guidon,  the  early  French  maritime  code,  of  which 
it  is  said  by  Kent,  that  "It  is  understood  to  be  a  fixed  rule, 
that  if  the  ship  be  so  injured  by  perils  as  to  require  repairs  to 
the  extent  of  more  than  half  her  value  at  the  time  of  the  loss, 
the  insured  may  abandon;  for  if  the  ship  or  cargo  be  damaged 
so  as  to  diminish  their  value  above  half,  they  are  said  to  be 
constructively  lost.  The  rule  came  from  the  French  law,  and 
is  to  be  found  in  the  treatise  of  Le  Guidon,  where  it  is  applied 
to  the  case-of  goods;  and  in  respect  to  both  ship  and  cargo,  the 
rule  has  been  incorporated  into  the  American  jurisprudence."* 
No  authority,  on  the  law  of  insurance,  has  failed  to  lay  stress 
upon  the  commercial  importance  of  insurance  and  among  others 
Duer,  by  far  the  most  learned  of  our  American  writers  on  the 
law  of  insurance,  in  his  treatise  published  in  1845,  ^^  various 
parts  of  his  work  fully  sustains  this  important  connection. 

Considerations  of  Federal  Supervision  and  Control. 
The  conclusion  that  insurance  is  an  element  of  commerce 
or  an  instrumentality  thereof  is  fundamental  to  all  efforts  to 
broaden  the  scope  of  insurance  law  and  legislation  by  making 
the  interstate  transactions  of  American  insurance  companies  sub- 
ject to  Federal  supervision  and  control.  In  a  still  broader  sense 
the  business  is  international  and  for  nearly  a  thousand  years 
some  of  the  most  important  principles  of  maritime  law  relating 
to  the  insurance  contract  have  been  the  same  among  the  trading 
nations  of  the  earth.     By  its  nature  the  insurance  business  is 

*  See  Kent's  Commentaries,  Vol.  Ill,  p.  329. 

205 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

national  and  international  and  to  limit  its  development  or  hinder 
its  growth  as  a  beneficent  social  institution  by  mere  arbitrary 
considerations  resulting  from  conditions  of  political  expediency 
is  to  go  contrary  to  the  whole  historical  development  of  the 
fundamental  principles  which  underlie  the  contract  and  the 
business  of  insurance  as  now  carried  on  by  corporate  enterprise 
throughout  the  world.  The  ultimate  regulation  and  control 
of  interstate  insurance  transactions  by  Federal  power  is,  there- 
fore the  logical  development  of  insurance  law  and  legislation 
which  from  its  origin  has  been  practically  co-incident  with  the 
insurance  contract  itself.  It  is  true  that  the  United  States 
Supreme  Court  has  repeatedly  held  that  insurance  policies  are 
not  transactions  in  commerce,  but  the  cases  which  have  come 
before  the  Court  have  never  involved  the  momentous  issue  of 
declaring  an  Act  of  Congress  providing  for  Federal  regulation  of 
insurance  companies  transacting  an  interstate  business  null  and 
void.  The  first  effort  to  bring  about  such  Federal  regulation  ap- 
pears to  have  been  made  in  1853,  when  it  was  suggested  that  a 
convention  of  insurance  presidents  and  actuaries  "agitate  for  a 
more  proper  basis  of  taxation  and  agree  upon  a  proper  memorial 
to  the  Legislatures  of  all  the  States."  for  it  was  said,  "it  is 
desirable  to  have  uniformity  in  these  thirty-one  sovereign 
States."*  The  effort  was  probably  suggested  by  the  Parlia- 
mentary investigation  into  Assurance  Associations  in  England 
in  1853  and  the  movement  to  establish  effective  Insurance 
Departments  in  the  more  important  Eastern  States.  The  sug- 
gested convention  did  not  materialize  and  nothing  further  seems 
to  have  been  done  until  1866,  when  the  first  bill  providing  for 
Federal  regulation  and  control  of  insurance  was  introduced  into 
Congress.  This  bill  provided  for  a  National  Bureau  of  Insurance 
in  somewhat  the  same  manner  as  the  new  National  Banking 
Act  provided  for  the  supervision  and  control  of  national  banks, 
in  place  of  the  more  or  less  insecure  state  banks  of  issue.  The 
bill  did  not  come  up  for  discussion  and  did  not  become  a  law. 

♦  Lectures  on  the  Science  of  Life  Ins.,  by  Jos.  L.  Knapp,  Phila.,  1853, 
p.  154. 

206 


origin  and  growth  of  law  and  legislation 

The  Case  of  Paul  vs.  Virginia. 

Two  years  later  a  case  was  decided  by  the  United  States 
Supreme  Court  in  which  it  was  held  that  "issuing  a  policy  of 
insurance  is  not  a  transaction  in  commerce"  and  "these  con- 
tracts are  not  articles  of  commerce  in  any  proper  meaning  of 
the  word."  This  case  of  Paul  vs.  Virginia  has  become  the 
rock  foundation  of  the  opponents  of  Federal  supervision  of 
insurance,  as  not  being  within  the  meaning  of  the  commerce 
clause  of  the  Constitution.  The  decision  has  governed  in  a  num- 
ber of  cases  which  have  followed  it  and  of  which  the  most  im- 
portant is  that  of  Hooper  vs.  California,  which  was  decided  by 
the  Supreme  Court  in  1895  ^^^  ^^  which  it  was  held  "that  the 
business  of  insurance  does  not  generally  appertain  to  such 
(interstate)  commerce  has  been  settled  since  the  case  of  Paul 
vs.  Virginia."  From  a  careful  reading  of  that  first  decree,  how- 
ever, it  does  not  appear  that  the  same  had  reference  to  the 
business  of  insurance,  but  rather  to  only  a  single  isolated  trans- 
action incident  thereto  and  that  is  the  issuing  of  a  policy  of 
insurance.  Surely  the  enormous  business  of  insurance  is  more 
and  means  more  than  the  issuing  of  policies!  But  so  the  Court 
decided  and  the  doctrine  was  continued  in  the  case  of  New 
York  Life  vs.  Craven  in  1900.  The  Court  in  that  case  held  also 
that  "we  only  repeat  the  business  of  insurance  is  not  commerce. 
The  contract  of  insurance  is  not  an  instrumentality  of  com- 
merce. The  making  of  such  a  contract  is  a  mere  incident  of  com- 
mercial intercourse  and  in  this  respect  there  is  no  difference 
whatever  between  insurance  against  fire  and  insurance  against 
the  perils  of  the  sea,  and  we  add,  or  against  the  uncertainty 
of  man's  mortality." 

Constitutional  Aspects  op  Insurance. 

These  decisions  notwithstanding,  persistent  efforts  have 
been  made  to  bring  the  business  of  insurance  within  the  scope 
and  authority  of  Federal  law.  Without  passing  upon  the 
soundness  of  the  Supreme  Court  decisions,  as  determined  by 
methods  of  statutory  construction  which  do  not  apply  to  general 

207 


ORIGIN   AND   GROWTH   OP   LAW   AND   LEGISLATION 

arguments,  it  may  be  pointed  out  that  as  far  as  known  the 
briefs  filed  with  the  various  cases  referred  to  do  not  disclose 
that  any  of  the  evidence  derived  from  an  extended  historical 
inquiry  into  the  origin,  purpose,  law  and  legislation  of  insur- 
ance was  taken  into  consideration  in  the  disposition  of  the 
cases  referred  to.  In  due  appreciation  of  what  is  common 
knowledge  on  the  subject,  and  with  a  due  regard  to  the  actual 
facts  of  insurance  as  an  element  of  everyday  commerce  and 
commercial  life,  the  Supreme  Court  decisions  are  opposed  to 
the  unbroken  chain  of  evidence  from  the  very  dawn  of  insur- 
ance to  the  present  day,  and  the  legal  reasoning  of  all  the  fore- 
most authorities  on  the  law  of  the  insurance  contract  as  an 
indispensable  aid  to  the  commerce  of  the  past  and  the  present 
day.  In  justice  to  the  integrity  and  intelligence  of  those  who 
have  made  the  effort  for  Federal  supervision,  it  is  but  right 
and  proper  that  they  should  not  be  charged  with  having  wil- 
fully disregarded  the  decisions  of  the  Supreme  Court  as  laid 
down  in  the  cases  referred  to,  but  that  they  hold  to  the  belief 
that  the  regulation  and  control  of  the  interstate  business  of 
insurance  companies  now  having  attained  to  enormous  propor- 
tions, is  a  matter  totally  different  and  distinct  from  the  very 
limited  transactions  and  very  narrow  considerations  of  law  and 
fact  involved  in  all  the  insurance  cases  before  the  Court  from 
Paul  vs.  Virginia  to  Nutting  vs.  Massachusetts. 

Suggestions  for  Federal  Supervision  and  Control. 

The  various  bills  that  have  been  introduced  into  Congress 
do  not  require  to  be  discussed  here  in  detail.  A  bill  for  the 
Federal  incorporation  of  insurance  companies  had  been  intro- 
duced into  Congress  in  1868  and  an  effort  was  made  in  1879, 
which  did  not  materialize  or  cause  the  introduction  of  a  specific 
bill.  In  1892  Mr.  John  Patten,  M.  C.  for  Ohio  (also  President 
of  the  Union  Central  Life  Ins.  Co.),  introduced  a  carefully  framed 
bill  for  Federal  supervision  and  control,  followed  in  1897  by 
a  revised  bill,  introduced  by  Senator  Piatt  of  Conn.,  and  re- 
introduced in  1899.    A  very  radical  bill  for  Federal  supervision 

208 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

and  national  control  was  introduced  into  the  House  by  Mr. 
Morrell  of  Pa.  in  1903  and  two  years  later  Senator  John 
F.  Dry  den  of  N.  J.  (also  President  of  the  Prudential  Ins.  Co. 
of  America)  introduced  a  bill  drawn  with  extreme  care  and 
modelled  largely  after  the  National  Banking,  Bankruptcy  and 
other  Federal  Acts.  The  bill  was  re-introduced  in  1906,  but 
it  never  came  up  for  public  discussion.  In  fact,  none  of  the 
bills  introduced  from  1866  to  1906  were  ever  publicly  discussed 
by  the  Congress,  but  dropped  by  committees  and  shelved.* 

Errors  Concerning  the  Early  Status  and  Extent  op 
Insurance  in  America. 

While  the  second  Dryden  bill  was  before  the  Senate  the 
Committee  on  Judiciary  of  the  House  of  Representatives  made 
a  report  on  the  regulation  of  corporations,  including  insurance, 
from  which  the  statement  has  previously  been  quoted  that  "in- 
surance companies  were  in  active  operation  in  this  country 
long  before  the  adoption  of  the  Constitution."  (1789).  The 
Committee  held  that  the  language  of  the  Chief  Justice  in  Mc- 
CuUoch  vs.  Maryland  was  not  applicable  to  the  doctrine  involved 
in  the  constitutional  aspect  of  Federal  regulation,  but  they  said 
"perhaps  the  language  quoted  would  be  very  apt  if  insurance 
had  just  been  developed  and  discovered  and  recognized  by  the 
commercial  world  as  commerce  and  would  very  properly  belong 
to  commerce.  No  one  questioned  but  that  all  would  concede 
that  it  would  come  within  this  definition  of  commerce  as  men- 
tioned in  the  Constitution."  As  a  matter  of  fact  and  history 
and  as  fully  brought  out  by  this  inquiry  into  almost  neglected 
sources  of  insurance  information,  insurance  was  practically 
unknown  and  unused  in  the  Colonies  and  the  States  previous 
to  the  adoption  of  the  Constitution  in  1789  and  the  first  insur- 
ance corporation  did  not  come  into  existence  until  1794I  By 
their  own  reasoning,  therefore,  the  House  Committee  on  Judi- 

*  The  two  Dryden  bills  have  been  re-printed  in  full,  with  other  matter 
pertaining  thereto  in  Papers  and  Addresses,  by  John  F.  Dryden,  Newark, 
N.  J.,  1910. 

209 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

ciary  gave  endorsement  to  the  view  that  upon  the  facts  as  here 
disclosed,  the  business  of  insurance  is  within  an  exact  and 
historical  definition  of  commerce  and  as  such  within  the  scope 
of  the  commerce  clause  of  the  Constitution. 

Argument  for  Federal  Supervision  as  a  Constitutional 

Solution. 

The  whole  argument  in  favor  of  the  power  of  Congress  to 
legislate  upon  the  subject  of  interstate  insurance  transactions 
(which  constitute  82%  of  the  whole  business  in  the  life  branch 
alone)  was  summed  up  by  Mr.  Richard  V.  Lindabury,  of  New- 
ark. N.  J. 

"Whether  or  not  insurance  is  commerce  is  a  question  of 
fact,  the  answer  to  which  depends  upon  the  ascertainment  not 
merely  of  the  inherent  characteristics  of  insurance,  but  also 
of  the  usages  of  the  commercial  world  with  respect  thereto. 
The  finding  of  a  court,  therefore,  upon  this  question  in  a  par- 
ticular case  or  class  of  cases  does  not  bind  the  public  or  third 
persons  or  foreclose  them  from  insisting  to  the  contrary  of  such 
finding  in  any  future  action  where  the  question  may  arise. 

The  question  before  the  court  in  the  insurance  cases  was 
not  whether  a  State  could  regulate  or  prohibit  interstate  insur- 
ance, but  whether  it  could  do  this  with  respect  to  insurance 
effected  wholly  within  such  State. 

The  decisions  of  the  Supreme  Court  in  the  interpretation 
of  the  Constitution  are  not  to  be  regarded  as  possessing  the 
same  element  of  finality  as  are  their  decisions  establishing 
rules  of  property.  The  latter  cannot  be  departed  from  without 
danger  of  disturbing  titles  or  contract  rights  which  may  have 
become  vested  thereunder.  The  former,  however,  may  and 
should  be  disregarded  whenever  necessary  to  maintain  the  fun- 
damental law  of  the  Constitution  or  to  prevent  the  extension 
of  an  erroneous  principle. 

The  power  of  determining  whether  or  not  a  particular 
business  shall  be  regulated  as  interstate  commerce,  and  for 
that  purpose  of  determining  whether  or  not  it  is  capable  of 
being  so  regulated,  is  committed  by  the  Constitution  to  Con- 
gress, at  least  in  the  first  instance,  and  it  cannot  be  assumed 
that  the  Supreme  Court,  by  any  declaration  or  abjudication 
in  advance  of  Congressional  action,  intended  to  prejudge  the 

210 


ORIGIN    AND    GROWTH    OF    LAW    AND    LEGISLATION 

question  of  the  rightfulness  of  the  exercise  of  this  power  in  a 
given  case. 

It  does  not  follow  that  because  at  one  time  insurance 
appeared  to  the  Supreme  Court  to  be  a  mere  incident  of  com- 
merce, it  must  be  forever  and  for  all  purposes  so  regarded. 
Nor  does  it  follow  that  Congress,  in  determining  the  public  policy 
of  the  nation,  may  not  now  declare  that  insurance  shall  hereafter 
be  regarded  and  treated  not  as  a  mere  incident  o  commerce, 
but  as  an  integral  part  of  commerce  or  as  an  important  aid  to 
or  instrumentality  thereof." 

Wilson  and  Hamilton  on  Insurance  as  an  Element 
OF  Commerce. 

To  this  admirable  summary  there  is  nothing  to  add.  It 
is  a  well-reasoned  opinion,  in  strict  conformity  to  the  facts 
and  in  harmony  with  the  view  of  James  Wilson,  himself  a 
member  of  the  Federal  Constitutional  Convention,  who,  speak- 
ing of  the  Law  Merchant,  said,  "This  system  of  law  has  been 
admitted  to  decide  controversies  concerning  bills  of  exchange, 
policies  of  insurance,  and  other  mercantile  transactions,  both 
when  citizens  of  different  states  and  citizens  of  the  same  state 
only  have  been  interested  in  the  event."*  Equally  pertinent 
and  conclusive  is  the  statement  of  Alexander  Hamilton,  who, 
in  his  official  opinion  to  Washington  upon  the  constitutionality 
of  a  U.  S.  Bank,  enumerated  among  the  powers  of  the  govern- 
ment to  regulate  commerce  with  foreign  nations,  "the  regula- 
tion of  policies  of  insurance,  the  regulation  of  pilots,  and  the 
regulation  of  bills  of  exchange."  t 

Advantages  of  Federal  Supervision  of  Interstate 
Insurance  Transactions. 

Upon  identical  facts  and  considerations  rests  the  whole 
theory  and  persistent  agitation  of  the  advocates  of  Federal 
supervision  of  insurance.  The  foremost  of  these,  ex-Senator 
John  F.  Dryden  of  New  Jersey,  in  an  address  before  the  Newark 

♦Wilson's  Works,  Vol.  I,  p.  335. 

t  Hamilton's  Works,  by  H.  C.  Lodge,  Vol.  Ill,  p.  203. 

211 


ORIGIN   AND   GROWTH   OP   LAW   AND   LEGISLATION 

Board  of  Trade,  on  January  i8,  1906,  summed  up  the  results 
of  his  own  distinguished  efforts  in  the  statement  that, 

"A  Federal  insurance  law  will  not  deprive  the  States  of 
any  rights  specifically  reserved  to  them  under  the  tenth  amend- 
ment. The  States,  under  the  bill  introduced,  will  retain  all  the 
rights  and  powers  over  their  own  corporations  which  constitu- 
tionally belong  to  them,  but  the  bill  will  put  an  end  to  the 
multiform  system  of  State  supervision  and  control  over  insur- 
ance corporations,  which  ha&  no  justification  in  any  sound 
theory  of  constitutional  rights  or  in  any  common-sense  con- 
ception of  State  duty.  The  bill  will  put  an  end  to  interstate 
chaos  and  terminate  an  intolerable  condition  of  affairs  jeopar- 
dizing the  interests  and  at  times  the  very  existence  of  companies 
transacting  interstate  business.  The  bill  will  establish  insur- 
ance companies  upon  a  national  basis  and  give  to  the  business 
a  national  character.  The  bill  will  bring  insurance  companies 
engaged  in  interstate  business  within  the  power  and  control  of 
the  Federal  government  and  provide  a  system  of  supervision, 
examination  and  control,  thorough,  exacting  and  complete. 
The  bill  will  increase  the  value  of  every  form  of  insurance, 
materially  enhance  the  security  of  the  policyholders,  and  broaden 
the  field  of  business  operations  to  an  extent  impossible  under 
the  present  system  of  supervision  and  control  by  some  fifty 
different  States  and  Territories.  The  States  will  continue  to 
supervise  insurance  corporations  of  their  own  creation,  but  they 
will  be  deprived  of  power  to  supervise  corporations  of  other 
States  and  to  legislate  regarding  them,  chiefly  for  the  purpose 
of  raising  revenue  or  of  harassing  the  companies  by  vexatious 
statutory  requirements.  It  is  not  a  theory,  but  a  condition, 
which  confronts  the  companies  and  their  policyholders,  who  in 
their  aggregate  capacity  represent  the  nation  and  not  individual 
States.  The  policyholder  is  primarily  and  chiefly  interested  in 
the  security  and  value  of  his  contract,  in  the  rate  of  premium 
which  he  pays,  and  in  the  safe  and  economical  administration 
of  the  company  with  which  he  insures.  It  is  not  a  question 
with  him  whether  the  company  is  located  in  the  particular 
State  in  which  he  lives,  or  in  any  other  State.  As  a  life  insur- 
ance policyholder  living  to-day  in  one  State,  he  may  tomorrow  live 
in  another,  but  his  contract  of  insurance  goes  with  him  and 
protects  and  sustains  him  in  the  event  of  calamity  or  loss.  It 
is  not  a  theory  that  this  business  is  national  in  extent  and 
character,  but  an  incontrovertible  fact  readily  within  the  com- 

212 


ORIGIN   AND   GROWTH    OF   LAW   AND   LEGISLATION 

prehension  of  any  one  who  will  carefully  consider  the  vast 
extent  of  the  busifiess  operations  and  the  true  character  of 
insurance  transactions.  It  is  upon  this  ground  that  the  advo- 
cates of  Federal  supervision  rest  their  arguments  and  anticipate 
a  favorable  ruling  from  the  Supreme  Court  in  the  event  of  the 
constitutionality  of  a  law  to  this  effect  being  brought  to  a  test." 

Apparent  Futility  to  Bring  About  Uniform  Legislation. 

No  answer  has  been  made  to  this  masterly  summing  up 
of  the  cause  of  Federal  supervision  of  insurance.  No  answer 
can  be  made,  save  in  the  acceptance  of  the  principles  laid  down 
and  the  conclusions  warranted  by  the  facts  of  history  and 
e very-day  business  experience.  The  day  must  come  when  the 
multitude  of  States  will  no  longer  have  the  power  and  unequiv- 
ocal privilege  to  impair,  by  more  or  less  ill-advised  legislation, 
an  institution  of  such  vast  social  and  economic  importance 
as  insurance.  For  the  time  being,  however,  the  outlook  for 
Federal  supervision  of  insurance  is  practically  hopeless.  The 
alternative  lies  in  the  direction  of  securing  uniformity  of  law  and 
legislation.  Efforts  in  this  direction  have  also  practically  been 
failures.  At  least  six  distinct  attempts  at  uniform  codifi- 
cation of  the  American  law  of  insurance  have  been  made,  but 
no  practical  success  has  been  attained.  The  evils  of  over- 
legislation  are  made  evident  by  the  statement  that  during  the 
nine  years  ending  with  1908  not  less  than  1,200  specific  laws 
pertaining  to  the  business  of  insurance  were  enacted  by  the 
different  States.  These  laws  have  reference  chiefly  to  statutory 
requirements,  which  it  would  be  an  utterly  hopeless  task  to 
summarize,  on  account  of  their  variety  and  contradictions. 
The  state  of  the  common  law  is  also  one  of  chaos,  conflict  and 
dissimilarity.  As  was  said  by  ex-Senator  Dryden,  "What  is  per- 
mitted to  be  done  in  one  State,  is  forbidden  in  another;  and 
what  is  the  law  of  one  year,  may  not  be  the  law  of  the  next. 
The  whole  subject  is  enormously  complicated  by  retaliatory  laws, 
which  have  resulted  in  a  condition  properly  described  as  inter- 
state warfare,  unworthy  of  the  civilization  of  the  present  day." 

213 


origin  and  growth  op  law  and  legislation 

Need  op  a  Uniporm  Code  on  Insurance. 

Previous  efforts  in  the  direction  of  uniform  legislation  have 
been  failures,  but  there  is  hope  that  expert  codification  for  the 
District  of  Columbia  may  produce  a  model  law,  suitable  for 
adoption  by  the  different  States.  However,  as  said  by  ex- 
Senator  Dry  den,  in  his  address  on  Uniform  Law  and  Legislation 
on  Life  Insurance  at  the  National  Conference  called  by  the 
National  Civic  Federation,  in  1910, 

"The  task,  at  best,  will  be  an  arduous  one  and  it  will  be 
the  better  part  of  wisdom  to  make  haste  slowly.  Widely  con- 
flicting views  and  opinions  will  require  to  be  harmonized  and 
upon  some  matters  irreconcilable  differences  of  opinion  will 
make  a  departure  from  standard  requirements  seem  advisable. 
I  am  firmly  convinced  that  a  uniform  code  governing  the  essen- 
tials both  of  the  public  and  the  private  law  on  the  subject  of 
insurance  can  be  framed  and  the  past  experience  of  every  life 
insurance  company  transacting  business  in  the  different  States 
makes  it  desirable  and  proper  that  such  a  code  should  be  pre- 
pared. Failing  in  this,  the  only  ultimate  alternative  will  be 
the  supervision  and  control  of  the  interstate  business  of  Amer- 
ican insurance  companies  by  the  Federal  government.  Con- 
vinced today,  as  I  have  been  for  many  years,  that  such  super- 
vision is  both  constitutional  and  a  rightful  exercise  of  Federal 
power,  I  trust  that  the  deliberations  of  the  convention  will  do 
away  with  the  possible  necessity  of  Federal  supervision  by  the 
enactment  of  rational  and  uniform  insurance  laws  throughout 
the  different  States,  Territories,  and  possessions  of  the  United 
States." 

Conclusions. 

Law,  like  insurance,  is  a  progressive  science  and  legisla- 
tion on  insurance  in  the  long  run  attains  the  desired  object  of 
increasing  the  security  of  the  contractual  relations  and  of 
enhancing  the  economic  and  social  value  of  insurance  institu- 
tions to  the  advantage  of  the  State.  All  proper  insurance  law 
has  aimed  towards  betterment,  but  almost  from  the  beginning 
of  the  recorded  history  of  the  business  there  is  evidence  that 
the  insurance  contract  has  been  held  to  be  one  peculiarly  en- 
titled to  the  interest  of  government.    The  principles  of  equity 

214 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

and  public  policy  which  underlie  the  earliest  insurance  ordinances 
and  laws  also  underlie  the  law  and  legislation  of  today.  The 
law  laid  down  in  the  Chancery  case  of  1693,  as  to  insurable 
interest,  is  the  law  today.  The  statutory  enactments  have  given 
dignity  and  force  to  the  legal  status  of  insurance  and  the  busi- 
ness is  now  the  most  completely  supervised,  controlled  and 
regulated  form  of  commercial  enterprise  in  the  world.  The 
theory  of  insurance  supervision  and  control  is  therefore  not  new, 
but  as  old  as  the  business  itself.  The  theory  of  State  supervision 
did  not,  as  often  claimed,  originate  with  the  organization  of 
the  Massachusetts  Department,  but  it  had  its  beginning  in  the 
Gambling  Acts  of  1754  and  1774  and  the  charter  provisions 
of  the  first  insurance  company  chartered  by  the  State  of  Massa- 
chusetts in  1799  and  the  Act  of  that  State  passed  in  the  year 
1808.  The  theory  of  State  supervision  of  interstate  business 
has  developed  out  of  circumstances  and  conditions  beyond  the 
control  of  the  separate  States.  The  theory  of  Federal  super- 
vision of  insurance  is  the  logical  solution  of  a  vast  amount  of 
conflict  in  law  and  legislation.  Federal  and  State.  Insurance 
corporations,  chartered  by  the  State,  tend  more  and  more  to 
become  regulated  and  controlled  even  in  matters  of  detail, 
standard  policies,  methods  of  valuation,  limitation  of  expense 
and  limitation  of  business,  etc.,  until  State  responsibility  has 
almost  superseded  full  legal  and  moral  responsibility  on  the 
part  of  the  companies'  administrative  officers.  Yet  it  remains 
true,  more  true  to-day  even  than  when  it  was  written  by  Justice 
Holmes  on  the  Common  Law,  that  "The  State  might  conceiv- 
ably make  itself  a  mutual  insurance  company  against  accidents, 
and  distribute  the  burden  of  its  citizens'  mishaps  among  all 
its  members.  There  might  be  a  pension  for  paralytics,  and 
State  aid  for  those  who  suffered  in  person  or  estate  from  tem- 
pest or  wild  beasts.  As  between  individuals  it  might  adopt 
the  mutual  insurance  principle  pro  tanto,  and  divide  damages 
when  both  were  in  fault,  as  in  the  rusticum  judicium  of  the 
admiralty,  or  it  might  throw  all  loss  upon  the  actor  irrespective 
of  fault.     The  State  does  none  of  these  things,  however,  and 

215 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

the  prevailing  view  is  that  its  cumbrous  and  expensive  ma- 
chinery ought  not  to  be  set  in  motion  unless  some  clear  benefit 
is  to  be  derived  from  disturbing  the  status  quo.  State  inter- 
ference is  an  evil,  where  it  cannot  be  shown  to  be  a  good.  Uni- 
versal insurance,  if  desired,  can  be  better  and  more  cheaply 
accomplished  by  private  enterprise." 

The  following  suggestive  words  of  Herbert  Spencer  may 
also  aptly  be  quoted  in  this  connection  :  "  Which  is  the 
more  misleading,  belief  without  evidence,  or  refusal  to  believe 
in  presence  of  overwhelming  evidence  ?  If  there  is  an  irrational 
faith  which  persists  without  any  facts  to  support  it,  there  is  an 
irrational  lack  of  faith  which  persists  spite  of  the  accumula- 
tion of  facts  which  should  produce  it;  and  we  may  doubt 
whether  the  last  does  not  lead  to  worse  results  than  the  first."* 
The  whole  history  of  insurance  law  and  legislation  sus- 
tains the  belief  and  conviction  that  government  supervision, 
regulation  and  control  of  corporations  engaged  in  interstate 
business  is  a  Federal  and  not  a  State  function  and  it  would 
be  going  contrary  to  the  facts  of  history  and  the  growth  of 
human  intelligence  and  the  whole  theory  which  underlies  a 
representative  form  of  government,  that  the, highest  enduring 
considerations  of  public  policy  should  be  made  subservient  to 
an  abuse  of  the  doctrine  of  stare  decis,  or  even  worse,  to  un- 
worthy considerations  of  political  expediency. 

LIST  OF  REFERENCES. 

1810  Abbott,  Chas. ;  Treatise  on  the  Law  of  Merchant  Ships  and  Sea 
Men ;  and  American  from  the  3rd  London  Edition,  Newburyport, 
1810.     (Insurance,  p.  90.) 

1855  Abstract  of  the  Return  and  Statement  of  Foreign  Insurance  Com- 
panies for  the  year  ending  December  31,  1854;  prepared  from 
official  returns  by  Ephraim  M.  Wright,  Sec'y  of  the  Common- 
wealth.    Boston,  1855. 

1836  Act  of  Incorporation  and  By-Laws  of  the  Herkimer  County  Mutual 
Insurance  Company,  dated  April  29,  1836.   Albany,  N.  Y.,  1851. 


♦  Ethics  of  Social  Life,  Part  IV,  Par.  133. 

216 


ORIGIN   AND   GROWTH   OP   LAW  AND   LEGISLATION 

1 85 1  Act  of  1 85 1  relating  to  the  Life  Insurance  Companies  transacting 
business  in  the  State  of  New  York  with  observations  on  ill- 
advised  legislation,  in  the  section  on  Commercial  Regulations 
of  Himt's  Merchant's  Magazine,  1851,  p.  755. 

1 85 1  Address,  etc.,  on  the  American  Temperance  Life  Insurance  Com- 
pany, organized  July,  1851,  Hartford,  Conn.,  containing  state- 
ment by  Comptroller  of  Public  Accounts,  dated  Hartford, 
August  27,  1851,  that  "The  strength,  ability  and  well  invested 
capital  of  this  institution,  are  surpassed  by  no  other  Life  Insur- 
ance Company,  which  entitles  it  in  my  opinion,  to  the  fullest 
confidence  of  the  public." 

1850  Address,  etc.,  on  the  Merchant's  and  Mechanics'  Mutual  Life 
Insurance  Company,  New  York,  including  copy  of  charter 
granted  May  17,  1850. 

1854  Address,  etc.,  on  the  Susquehanna  Mutual  Life  Insurance  Com- 
pany of  Harrisburg,  Pa.,  Chartered  March  23,   1854. 

1788  A  General  Treatise  of  Naval  Trade  and  Commerce,  as  founded 
on  the  Laws  and  Statutes  of  this  Realm,  2  Vols.,  London,  1788. 
(Vol.  I,  Chap.  VII,  treats  of  the  Insurance  of  Ships;  Chap- 
VIII  of  Marine  Contracts  and  Bottomry.  List  of  Statutes 
since  1601  given  in  Vol.  I,  p.  81,  et  seq.) 

1841  A  Historical  View  of  the  Law  of  Maritime  Commerce,  by  James 
Reddie.     London. 

1 810  A  Letter  to  Jasper  Vaux,  Chairman  of  the  Meeting  at  Lloyd's, 
etc.,  in  which  the  nature  and  principles,  and  the  past  and 
present  extent  of  Marine  Assurance  are  examined;  and  the 
necessity  of  a  new  company  to  effect  Marine  Assurance  pointed 
out;  and  the  opposition  displayed  to  its  establishment,  espe- 
cially by  the  Underwriters  at  Lloyd's  Coffee-House,  is  con- 
sidered and  refuted.  By  a  subscriber  to  Lloyd's.  London, 
1810. 

1847  AUgemeiner  Plan  Hamburgischer  Seeversichenmgen  von  dem 
Jahre,  1847.     Hamburg. 

1867  AUgemeine  Seeversicherimgs  Bedingungen  von  der  Handels- 
kammer  in  Hamburg.     1867. 

1901  Ames,  James  Barr;  Selection  of  Cases  on  the  Law  of  Admiralty 
Cambridge,  1901.  (For  case  of  Insurance  Company  vs.  Dun- 
ham, see  p.  39,  et  seq.) 

1836  An  Act  to  Incorporate  a  Fire  Insurance  Company  in  the  City  of 
Baltimore,  etc.  Baltimore,  1836.  (For  affording  additional 
security  to  commercial  transactions.) 

217 


ORIGIN   AND   GROWTH   OP  LAW  AND  LEGISLATION 

1830  An  Act  to  Incorporate  the  New  York  Life  Insurance  and  Trust 
Company.  (Sec.  18  of  this  Charter  required  reports  to  be  made 
annually  to  the  Chancellor,  empowered  to  make  a  thorough 
investigation  into  the  affairs  of  the  company,  etc.) 

1814  An  Address  from  the  President  and  Directors  of  the  Pennsyl- 
vania Company  for  Insurance  on  Lives  and  Granting  Annuities 
to  the  Inhabitants  of  the  United  States.     Phila.,  1814. 

1884     Annals  of  Lloyd's  Register,  1 834-1 884.     London,  1884. 

1808  Annesley,  Alexander;  Compendium  on  the  Law  of  Marine  Insur- 
ances, Bottomry,  Insurance  on  Lives,  etc.,  Middletown,  Conn., 
1808;  (probably  the  first  American  treatise  on  the  law  of  insur- 
ance). Speaks  of  marine  insurance  as  "that  important  branch 
of  commercial  enterprise." 

1826  Argument  in  support  of  the  Memorial  of  the  Marine  Insurance 
Company  of  Baltimore  to  the  Congress  of  the  United  States, 
praying  compensation  for  losses  sustained  under  the  Treaty 
with  Spain  of  the  22nd  of  February,  181 9,  by  Robt.  Taylor. 
Norfolk,  1826. 

1909  Ashbumer,  Wm. ;  The  Rhodian  Sea-Law,  from  original  manu- 
scripts.    Oxford,  1909. 

1806  Azuni,  D.  A.;  The  Maritime  Law  of  Europe,  2  Vols.;  translated 
from  the  French.     New  York,  1806. 

1856  Baily,  Laurence;  General  Average  and  the  Losses  and  Expenses 
resulting  from  General  Average  Acts;  2nd  Ed.,  London,  1856; 
(with  special  reference  to  the  doctrine  or  principle  of  "com- 
mon interest"),     p.  7. 

1898  Baldwin,  Simeon,  Modem  Political  Institutions,  Chap.  VI,  on 
Freedom  of  Incorporation.     Boston. 

1882  Barber.  Wm,;  Principles  of  Law  of  Insurance,  as  adopted  in  the 
Civil  Code  of  California;  San  Francisco,  1882. 

1752  Beawes,  Wjnidham;  Lex  Mercatoria  Rediviva,  or  the  Merchant's 
Directory,  London,  1752.  (Article  on  Insurance,  pp.  261-307.) 

1905  Beck,  James  M.;  Federal  Supervision  of  Insurance,  reprint  of 
address.     New  York,  1905. 

1846  Beckmann,  John;  History  of  Inventions,  Discoveries  and  Origins; 
translated  from  the  German  by  Wm.  Johnston,  4th  Ed.,  Vol. 
I,  p.  234.     London,  1846. 

1850     Benedict,  Erastus  C. ;  American  Admiralty.     New  York,  1850. 

1891  Beneke,  Max;  Der  Ristomo  in  der  Seeversichenmg.  Berlin, 
1891. 

1852.  Binney,  Horace;  Centennial  Meeting,  Address  on  the  Philadel- 
phia Contributionship  for  the  Insurance  of  Houses  from  Loss 
by  Fire.     Phila.,  1852. 

218 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

x8io  Binney,  Horace;  Reports  of  Cases  adjudged  in  the  Supreme 
Court  of  the  State  of  Pennsylvania.     Phila.,  1810,  Vol.  II. 

1765  Blackstone;  Commentaries  on  the  Laws  of  England;  Book  II, 
Chap.  30. 

1832  Blimt,  Joseph;  Merchant's  and  Shipmaster's  Assistant,  New 
York,  1832.     (Chap.  VII  treats  of  Insurance,  Average,  etc.) 

1905  Breckenridge,    Ralph    W. ;    Report   of    Committee    on    Insurance 

Law  of  the  American  Bar  Association  (in  favor  of  Federal 
regulation  of  insurance).  Report  of  28th  Annual  Meeting  of 
the  American  Bar  Association.     Phila.,  1905. 

X826  Buck  and  Hedrick  vs.  The  Chesapeake  Insurance  Company, 
Baltimore,  1826. 

1854     Bunyon,  Chas.  J.;  Law  of  Life  Assurance.     London,  1854. 

1 80 1  Bum,  John  I.;  Practical  Treatise  or  Compendium  of  the  Law  of 

Marine  Insurances.     London,  1801. 
1830     Bumey,  Wm.,  Universal  Dictionary  on  the  Marine.    London,  1830. 

1 80 2  Caines,   George;   "An   Enquiry  into   the   Law   Merchant  of   the 

United   States;  or.    Lex    Mercatoria    Americana."    Vol.  I    (all 
printed).     New  York,  1802. 
1907     Calvert,  Thos.   H. ;  Regulation  of  Commerce  under  the   Federal 
Constitution.    Northport,  L.  I.,  1907.    (Insurance,  p.  245,  et  seq.) 

1907  Carter,  James  C;  Law;  its  Origin,  Growth  and  Function,  New 

York,  1907. 

1906  Centralization  and  the  Law,  with  an  introduction  by  Melville  M. 

Bigelow.     Boston.     P.  191. 

1844  Charter  and  By-Laws  of  the  State  Mutual  Life  Insurance  Com- 
pany of  Worcester,  Mass.,  incorporated  March  16,  1844.  Wor- 
cester, Mass.,  1845. 

1876  Clarke,  Julius  L. ;  Historical  Sketch  of  Insurance  Legislation  in 
Massachusetts;  Appendix  to  21st  Annual  Report  of  Insurance 
Commissioner  of  Massachusetts.     Boston,  1876. 

1 81 9  Constitution  and  By-Laws  of  the  Female  Friendly  Institution  of 
the  City  and  Liberties  of  Philadelphia.  Phila.,  181 9.  (Pro- 
vided for  the  payment  of  $20  at  death.) 

1908  Cooke,  Frederick  H. ;  Commerce  Clause  of  the  Federal  Constitu- 

tion.    New  York,  1908.     (Insurance,  p.  15.) 
1905     Cooley,   Roger  W.;  Briefs  on  the  Law  of  Insurance  in   5  Vols. 

St.  Paul,  Minn.,  1905. 
1893     Coxe,  Brinton;  An  Essay  on  Judicial  Power  and  Unconstitutional 

Legislation.     Phila.,  1893. 
1 810     Cursory  observatiohs  upon  the  proposed  application  to  the  Legis- 
lature of  these  Kingdoms  for  the  Grant  of  a  Charter  to  effect 
Marine  Insurances.     London,  1810. 

219 


ORIGIN   AND   GROWTH   OF   LAW   AND   LEGISLATION 

187a  Daly,  C.  P.;  Opinion  on  Barratry;  its  Origin,  History  and  Mean- 
ing.    New  York,  1872. 

1905  Davis,  John  P.;  Corporations;  a   Study  of  their  Origin,  etc.,   a 

Vols.,  New  York,  1905. 
1859     Dixon,   Francis  B.;    Abridgment  of  the  Maritime   Law,  Norfolk, 
1859. 

1906  Dryden,  John  F. ;  Commercial  Aspects  of  Federal  Regulation  of 

Insurance.      (Re-published  in  Papers  and  Addresses,   1910.) 
1910     Dryden,  John  F. ;  Uniform  Law  and  Legislation  on  Life  Insur- 
ance; address  before  National  Civic  Federation  Conference  on 
Uniform  Legislation.     Washington,  1910. 
n.  d.     Dubost,  Christopher;  Elements  of  Commerce.     2  Vols.,  London. 

1907  Duckworth,  Lawrence;  An  Encyclopedia  of  Marine  Law.     Lon- 

don, 1907. 

1845  Duer,  John;  Law  and  Practice  of  Marine  Insurance,  2  Vols.  New 
York,  1845. 

183a     Ellis,  Chas.;  Law  of  Fire  and  Life  Insurance.     London,  1833. 

1844  Erichsen,  E.  M.  W.;  Enthfillungen  von  Havarie-Umtrieben, 
Altona,  1844. 

1797  'Espinasse,  Issac;  Reports  of  Cases  Argued  and  Ruled  at  Nisi 
Prius,  1 793-1 796.     Dublin,  1797. 

1853  Europaeischen  Seerechtes,  Havarie,  Assecuranz  und  Bodmerei. 
Hamburg,  1853. 

1 8a  I  Explanatory  Remarks  and  Observations  o;i  the  subject  of  fire 
Insurance,  having  reference  to  Policies  of  the  Merchants  Insur- 
ance Company  in  Boston.     Boston,  1821. 

1855     First  Massachusetts  Insurance  Report.     Boston,   1856. 

185a     Flanders,  Henry;  Treatise  on  Maritime  Law.     Boston,  1852. 

1888  Fowler,  J.  A.;  History  of  Insurance  in  Philadelphia  for  Two 
Centuries,  1688-1882.     Phila.,  1888. 

1840  Fraud  upon  Underwriters;  Article  in  Hunt's  Merchant's  Maga- 
zine, 1840,  p.  288. 

1866  Fundamental  By-Laws  and  Tables  of  Rates,  etc.,  printed  by  the 
Corporation  for  the  Relief  of  Widows  and  Children  of  Clergy- 
men, in  the  Communion  of  the  Protestant  Episcopal  Church, 
etc.     Phila.,  1866. 

177a  Gordon,  Wm.;  The  Plan  of  a  Society  for  Making  Provision  for 
Widows,  by  Annuities  for  the  remainder  of  Life,  etc.  Bos- 
ton, 1772. 

(Probably  the  rarest  document  on  insurance  in  America.) 

1909  Gow,  Wm.;  A  Handbook  of  Marine  Insurance,  Revised  Edition. 
London,  1909. 

220 


ORIGIN   AND   GROWTH   OP  LAW  AND   LEGISLATION 

1885     Graham,  J.  C;  Treatise  on  the  Contract  of  Sale.     (Article  on 

Insurance,  p.  132.) 
1811     Hall,  John  E. ;  An  Essay  on  Maritime  Loans,  from  the  French  of 

B.  M.  Emerigon,  with  notes,  etc.     Baltimore,  181 1, 

1809  Hall,  John  E.    Practice  and  Jurisdiction  of  the  Court  of  Admir- 

alty.    Baltimore,  1809. 

1840  Hammond,  Elisha,  Counsellor-at-Law;  Law  of  Fire  Insurance 
and  Insurance  on  Inland  Waters.     New  York,  1840. 

1901  Hardy,  E.  R.;  Early  Insurance  Offices  in  Massachusetts  (1734- 
1801),   Boston  Insurance  Library  Association.     Boston,   1901. 

1849  Hartford  Life  and  Health  Insurance  Company;  address  on  life 
insurance,  its  Advantages,  etc.,  with  Rates,  Rules,  Regula- 
tions, etc.     Hartford,  1849. 

1906  Hearing  before  the  House  Committee  on  the  Judiciary  in  relation 
to  Federal  Supervision  of  Insurance.  Washington,  D.  C, 
1906. 

1906  Hendrick,  Frank;  The  Power  to  Regulate  Corporations  and  Com- 
merce; New  York,  1906.     (Insurance,  p.  106.) 

1 810  Historical   reference    to    American    Fire    Insurance    Company   of 

Philadelphia,  chartered  by  the  Legislature  of  Pennsylvania, 
Feb.  28,  1 810,  with  reference  to  Pennsylvania  Law  of  1810, 
prohibiting  all  insurance  by  foreign  corporations  not  citizens  of 
the  United  States.     Spectator,  New  York,  April  7,   19 10. 

1840  History  and  Law  of  Fire  Insurance;  Hunt's  Merchant's  Maga- 
zine, 1840,  p.  239. 

1881     Holmes,  O.  W.,  Jr.;  Common  Law.     Boston. 

1889  Hooper  vs.  California;  Record  of  Case  No.  13,  586;  statement  at 
to  facts,  p.  37;  opinions  of  the  Court,  p.  37.     (Filed,  1889.) 

1859  Hopkins,  Manley;  Handbook  of  Average,  2nd  Ed.  London, 
1859. 

1901  Hughes,  Robt.  M.;  Handbook  of  Admiralty  Law,  St.  Paul,  1901. 
(Chapter  III  treats  of  General  Average  and  Marine  Insur- 
ance and  Chapter  IV  of  Bottomry  and  Respondentia  Bonds.) 

1843  Hunt's  Merchant's  Magazine,  1843,  P-  ^69  (abstract  of  an  opinion 
in  the  case  of  a  whaling  voyage  from  Nantucket). 

1834  In  Chancery  before  the  Chancellor  in  the  Matter  of  the  New 
York  Life  Insurance  and  Trust  Company,  Answer  and  Report, 
March,  1834. 

1907-  Index  to  Economic  Material  in  the  Documents  of  the  States  of 
08  the  United  States;  prepared  by  the  Dept.  of  Economic  Sociol- 
ogy of  the  Carnegie  Institute.  New  York,  1907.  Mass.,  1908; 
New  Hampshire,  1907. 

931 


ORIGIN   AND  GROWTH   OF   LAW   AND   LEGISLATION 

X906  Insurance  Convention  (Chicago);  Message  from  the  President  of 
the  United  States,  with  report  and  recommendations,  59th 
Congress,  ist  Session;  Senate  Docimient  333,  Washington, 
D.  C,  April  17th,  1906. 

1 910     Insurance  Enactments  of  1909,  Law  Reporting  Co.     New  York. 

1744  Jacob,  Giles;  New  Law  Dictionary  (article  on  insurance).  Lon- 
don, 1744. 

1904     Jones,  Paul;  Commercial  Power  of  Congress.     New  York,  1904. 

1826  Kent,  James;  Commentaries  on  American  Law,  ist  Ed.,  1827; 
12th  Ed.  edited  by  Oliver  Wendell  Holmes,  Jr.,  and  14th  Ed. 
edited  by  John  M.  Gould.  Boston,  1896.  (Insurance,  Vol. 
Ill,  p.  253  et  seq.) 

1909  Kingsley,  Darwin  P.;  Insurance  Supervision  and  National  Ideals 

North  American  Review,  April,  1909. 
1798     Klefeker,   F.   M.;   Von  der  Havareigrossa,  etc.,  der   Reichstadt 

Hamburg.     GOttingen,  1798. 
1 81 8     Laws  of  the  Sea;  with  reference  to  Maritime  Commerce  during 

Peace  and  War;  from  the  German  of  Friedrick  J.  Jacobsen,  by 

Wm.  Frick,  Counsellor-at-Law.     Baltimore,  181 8. 
1890     Lectures  on  Constitutional  History  and  Course  of  Development 

of   American    Law;   by    Cooley,    Hitchcock,   etc.     New  York, 

1890. 
1853     Lectures  on  Life  Insurance;   by  Moses  L.  Knapp,  M.  D.    Phila., 

1853- 

1910  Legal    Status   of   Seamen,   including   references   to   Ancient  Sea 

Laws.     Doc.  552,  6ist  Congress,  2nd  Session,  May  19. 

1814  Letter  from  the  Secretary  of  the  Treasury  transmitting  a  state- 
ment containing  the  information  in  relation  to  the  incorporated 
Banks  and  Insurance  Companies  within  the  District  of  Colum- 
bia, required  by  a  resolution  of  the  loth  inst.,  Feb.  22nd,  1814. 
Washington,  D.  C,  181 4. 

(First  official  report  on  insurance  in  the  United  States,  in- 
cluding reference  to  Marine  Insurance  Co.  of  Alexandria,  incor- 
porated by  the  Legislature  of  Virginia  on  Jan.   16,  1798.) 

1906  Lindabury,  Richard  V.;  Argument  on  Federal  Supervision  of 
Insurance,  prepared  for  Senate  Committee  on  Judiciary. 

1894  List  of  Cases  in  which  Statutes  of  the  United  States  have  been 
held  imconstitutional  by  the  Supreme  Court  of  the  United 
States,  1 792-1887  (20  cases  in  all).  Proceedings  New  Hamp- 
shire Bar  Association,  1894. 

1906  List  of  Works  relating  to  Government  Regulation  of  Insurance, 
Library  of  Congress.     Washington,  D.  C,  1906. 

1909-10     Lloyd's  Calendar.     London. 

222 


ORIGIN   AND   GROWTH   OF  LAW   AND   LEGISLATION 

1799  Manhattan  Insurance  Company  of  New  York,  chartered  in  1799; 
commenced  life  insurance  business  in  1800;  full  account  of,  in 
Weekly  Underwriter,  New  York,  Sept.  9,  1905.  (Also  Colum- 
bian Centennial  of  Boston,  May  28th,  1800.) 

1909  Manes,  Alfred,  Insurance  Cyclopaedia  (in  German),  2  vols.  Tubin- 
gen, 1909. 

1909     Marine  Insurance  Gambling  Act  (9th  Edw.   7,  Ch.   12). 

1909  Marine  Insurance  in  Export  Trade;  United  States  Consular  Re- 
port, Oct.  25th,  1909. 

1810  Marryat,  Joseph;  Speeches  on  Abuses  in  Marine  Insurance,  and 
Edition.     London,  1810. 

1810  Marshall,  Samuel;  Treatise  on  the  Law  of  Insurance,  2nd  Amer- 

ican   Edition,    including   cases   decided   in   the    National   and 
State  Courts,  by  J.  W.  Condy.     Phila.,  1810. 

(Considered  the  best  edition  of  Marshall's  works.) 

1808  Marshall  Samuel;  Treatise  on  the  Law  of  Insurance,  2  Vols.,  and 
Edition.     London,  1808. 

1876  Martin,  Frederick;  History  of  Lloyd's  and  Marine  Insurance  in 
Great  Britain.     London,  1876. 

1857.  Martineau,  Harriet;  Corporate  Tradition  and  Natural  Rights, 
Local  Dues  on  Shipping,  etc.     1857. 

1787     Millar,  John;  Elements  of  the  Law  of  Insurances.    Edinburgh,  1787. 

1909  Moldenhauer,  Paul;  Article  Seeversicherungs  in  Versicherungs 
Lexicon,  by  Alfred  Manes.     Tfibingen,  1909. 

1769  MoUoy,  Chas. ;  "De  Jure  Maritimo  et  Navali;"  or,  a  Treatise  of 
Affairs  Maritime  and  of  Commerce;  2  Vols.,  9th  Edition.  Lon- 
don, 1769.  (Article  Assurance,  Book  2,  Chap.  7;  article  Bot- 
tomry, Book  2,  Chap.  2.) 

1885  Montgomery,  Thos.  H. ;  History  of  the  Insurance  Company  of 
North  America.     Phila.,  1885. 

1 8 1 1  Montifiore ,  J. ;  The  American  Trader's  Compendium,    Phila . ,  1 8 1 1 . 
189a     Morrell,  C.  F. ;  Insurance;  a  Manual  of  Practical  Law.     London, 

1892. 
ipo8     Mutual  Life  Ins.  Co.  vs.  State  of  Ohio,  Supreme  Court  of  Ohio. 

No.  11,379;  Brief  for  Plaintiff  in  Error. 

No.  11,379;  Brief  for  Defendant  in  Error. 

No.  11,379;  Brief  for  Plaintiff  in  Error  in  Reply. 
1905     Nash,  Frederick  H.;  Federal  Supervision  of  Insurance;  Proceed- 
ings of  Insurance  Commissioners'  Convention,  1905 
1899     New  York  Life  vs.  Craven;  Statement,  Assignments  of  Error  and 

Brief  for  Plaintiff  in  Error,  October  Term,  U.  S    S.  C,  1899; 

Brief    for    Defendant   in    Error,    October   Term,  N.  Y.  S.  C, 

1899. 

223 


ORIGIN   AND   GROWTH   OP  LAW  AND  LEGISLATION 

1899     New  York  Life  vs.  Craven;  Transcript  of  Record;  Filed,  April 

14,  1899. 
185a     Norton,  Chas.  B.;  Handbook  of  Life  Insurance.    New  York,  1852. 
1833     Opinion  of  the  Supreme  Judicial  Court  of  Massachusetts  in  the 

case  of  Wm.  Eager  vs.  The  Atlas  Ins.  Co.,  with  remarks  thereon, 

By  an  Underwriter.     Boston,  1833. 

181 7  Park,  James  Allan;  System  of  Marine  Insurances,  etc.     Seventh 

Edition,  2  Vols.     London,  181 7. 
1790     Park,  James  Allan;  System  of  the  Law  of  Marine  Insurances, 

Second  Edition..     London,  1790. 
1857     Parliamentary  Report  on  Fire  Insurance  Duties.     London,  1857. 
1859     Parsons,  Theophilus;  Treatise  on  Maritime  Law,  2  Vols.     Boston, 

1859.     (Insurance,  p.  6,  et  seq.) 
1869     Paul  vs.    Virginia,   Transcript  of   Brief  of  Thos.    B.  Bowden  for 

Defendant  in  Error,  filed  U.  S.  S.  C,  October  1869.     (Mss.  on 

file  in  Library  of  Prudential  Ins.  Co.  of  America.) 
1868     Paul  vs.  Virginia;  Transcript  of  Brief  for  Plaintiff  in  Error;  Dec. 

Term   U.  S.  S.  C.     (Mss.  on  file  in  Library  of  Prudential  Ins. 

Co.  of  America.) 

1901  Peelle,  S.  C,  and  Deis,  J.  H. ;  General  Principles  of  the  Law  of 

Insurance.     Washington,  1901. 
1908     Peeps  into  the  Past;  Account  of  the  old  Amicable  and  Norwich 

Union  Life   Office,    1 706-1908      Norwich,   England,    1908. 
1823     Phillips,   Willard;  Treatise  on  the   Law  of  Insurance,    ist   Ed., 

Boston, 

1902  Plass,    F.;     Geschichte    der    Assecuranz    und    der   hanseatischen 

Versicherungs  BOrsen.     Hamburg,  1902. 

1904  Pollock,  Sir  Frederick;  Expansion  of  the  Common  Law.  Boston, 
1904. 

1751  Postlethwa)rt,  Malachy;  Universal  Dictionary  of  Trade  and  Com- 
merce, 2  Vols.,  London,  1751.     (Assurance  or  Insurance,  Vol. 

I.  PP-  135-131-) 

1898  Prentice  and  Egan;  Commerce  Clause  of  the  Federal  Constitu- 
tion.    Chicago,  1898.     (Insurance,  p.  46.) 

1832  Proposals  and  Rates  of  the  Baltimore  Life  Insurance  Company, 
Incorporated  December  Session,  1830.     Baltimore,  1832. 

1 81 8  Proposals  of  the    Massachusetts   Hospital   Life   Insurance   Com- 

pany, including  Act  of  Incorporation  of  181 8  and  Amendments 
of  1 823-1 82 4;  also  By-Laws,  Rules  and  Regulations.  Boston, 
1830. 
1 81  a  Proposals  of  the  Pennsylvania  Company  for  Insurances  on  Lives 
and  Granting  Annuities;  incorporated  March  10,  181 2,  with  a 
perpetual  charter.     Phila.,  1837. 

224 


ORIGIN  AND   GROWTH   OF   LAW   AND   LEGISLATION 

x8i8  Prospectus  of  the  Union  Insurance  Company,  incorporated  by 
the  Legislature  of  the  State  of  New  York  for  making  Insur- 
ance on  Lives  and  granting  Annuities  (with  extract  from  the 
charter).     New  York,  1818. 

1905  Randolph,  Carman  F.;  Federal  Supervision  of  Insurance;  Colum- 

bian Law  Review,  Vol.  5,  November,  1905,  pp.  500-528.     New 

York,  1905. 
1891     Rehme,   Paul;  Die   Haftung  des  Reeders  im  Mittelalter;  Inaug. 

Diss.,  Stuttgart,  1891. 
1893     Relton,  Francis  B.;  An  account  of  the  Fire  Insurance  Companies, 

Associations,  Institutions  and  Schemes,  etc.,  in  Great  Britain 

and  Ireland,  during  the  17th  and  i8th  Centuries,  including  the 

Sun  Fire  Office,  etc.     London,  1893. 
1856     Remarks  on  the  Proposed  Scheme  for  an  Insurance  Dep' t  at  Albany, 

N.  Y.    (No  signature,  no  place  of  publication,  or  name  of  printer.) 
181 1     Remarks  relative  to  the  Danger  Attendant  on  Convoys  together 

with  a  proposition  to  promote  commerce,  etc.     London,  181 1. 
1855     Report  of  Cases  decided  by  the  Supreme  Court  of  the  State  of 

New  York,  in  re  John  S.  Mitchell  vs.  New  York  Union  Ins. 

Co.     New  York,  1855.     (Contains  copy  of  conditions  of  policy 

of  insurance  made  in  November,  1852.) 
1836     Report  of  the  Committee  on  Mercantile  Affairs  and  Insurance, 

relative  to  Insurance  Companies.     Boston,  Feb.  24,  1836. 

1906  Report  of  the  House  Committee  on  the  Judiciary  in  relation  to 

the    Regulation   of   Corporations — 59th   Congress,    ist   Session, 
Report  2491. 

1907  Report  of  I.  L.  Pendleton,  Chairman  of  the  Joint  Ins.  Investi- 

gating Committee  of  the  55th  Gen'l  Assembly  of  the  State  of 

Tenn.     Nashville,  1907. 
1907     Report  of  the  Legislative  Ins.  Committee  for  Iowa.     Des  Moines, 

1907. 
1909     Report  of  Lloyds  and  Inter-Insurance  as  Conducted  in  New  York. 

N.  Y.  Ins.  Dept.,  Albany. 

1906  Report    of    New    Jersey    Senate    Committee  on  Life   Insurance 

Investigation,  4  vols.     Paterson,  N.  J.,  1906. 
1873-74     Report  of  Royal  Commission  on  Unsea worthy  Ships,  Parlia- 
mentary Papers  C853,  C853I,  C-1027. 

1907  Report  of  the    Joint  Special  Committee  on  Ins.,  appointed  to 

Revise  and  Amend  the  Ins.  Laws  of  the  Commonwealth  of  Mass. 
House  Doc.  1088.     Boston,  Mass. 
1 83 1     Report  of  the  Trustees  of  the   New  York  Life   Insurance  and 
Trust  Company,  made  to  the  Chancellor  of  the  State  of  New- 
York.     Albany,  1831. 

225 


ORIGIN   AND   GROWTH   OP   LAW   AND   LEGISLATION 

1853  Report  on  Assurance  Associations,  Parliamentary  Paper.  Lon- 
don, 1853. 

1906     Report  of  Wisconsin  Ins.  Investigation  Committee.    Madison,  1906. 

1900-09  Reports  01  the  Commissioners  on  Uniform  State  Legislation, 
loth-igth.     Pub.  by  the  American  Bar  Association,   1900-09, 

1 871-1909  Reports  of  the  Proceedings  of  the  National  Convention  of 
Insurance  Commissioners,  ist  to  40th,  1871-1909. 

1909  Richards,  George;  A  Treatise  on  the  Law  of  Insurance;  3rd  Ed. 
New  York,  1909. 

1905  Rogers,  James  S.;  Article  on  Power  of  Congress  over  Interstate 
and  Foreign  Commerce;  American  Law  Register,  1905. 

1905  Roosevelt,  T.;  Message  to  the  59th  Congress,  ist  Session, 
Washington,   1905.     (Insurance  mentioned  on  p.  16.) 

1851  Rules  and  Regulations  and  Warranties  of  the  Montrose  Insurance 
Association  deemed  a  part  of  the  Policies  of  Insurance  on 
Vessels  insured  by  them,  belonging  to  the  Ports  of  Montrose, 
Arbroath,  etc. 

1858  Second  Annual  Report  of  the  Massachusetts  Insurance  Com- 
mission on  Loan  Funds  Associations.     Boston,  1858. 

1894  Seeliger,  Arthur;  Inaugural  Dissertation  Der  "Erfolg"  als  Voraus- 
setzting  dergrossen,  Havarei,  Berlin,  1894.  (Contains  extensive 
historical  inquiry  into  the  theory  and  practice  of  contribution- 
ship  and  average.) 

1908  Senate  Proceedings  on  Governor's  Recommendation  upon  Fleming 
Report  for  Removal  from  Office  of  Supt.  of  Ins.  Otto  Kelsey. 
Albany,  N.  Y.,  1908. 

1901  Short  Historical  Sketch  of  the  Atlantic  Mutual  Insurance  (Com- 
pany, 1 842-1 90 1.     New  York,  1901. 

1769  Some  Accoimt  of  the  Charitable  Corporation  lately  erected  for 
the  Relief  of  Widows  and  Children  of  Clergymen  in  the  Com- 
mimion  of  the  Church  of  England  in  America,  by  Wm.  Smith, 
D.  D.     Phila.,  1769. 

1833  Stevens  and  Beneke;  Treatise  on  Average  and  Adjustment  of 
Losses  in  Marine  Insurance,  with  notes  by  Willard  Phillips. 
Boston,  1833. 

1905-6  Testimony  taken  by  the  Legislative  Insurance  Investigation 
Committee  and  Report,  10  vols.     Albany,  1905-6. 

1842  The  Law  of  Shipping  and  Insurance,  by  a  Member  of  the  Faculty. 
Edinburgh,  1842. 

1897  The  law  relating  to  imconscionable  bargains  with  money  lenders; 
including  the  History  of  Usury  to  the  Repeal  of  the  Usury 
Laws;  by  Hugh  H.  L.  Bellot  and  R.  J.  Willis.  London, 
1897. 

226 


ORIGIN   AND   GROWTH   OP  LAW   AND   LEGISLATION 

1902  The  Lottery  Cases,  Revised  Brief  for  the  United  States;  by  James 
M.  Beck,  Ass't  Attorney-General,  October  Term,  1902. 

1855  The  Objects,  Principles  and  Regulations  of  the  New  England 
Mutual  Life  Ins.  Co.  of  Boston,  including  Act  of  Incorpora- 
tion of  1835,  providing  for  capital  stock  and  gradual  redemp- 
tion   of    annual    subscriptions    out    of    profits,  etc.     Boston, 

1855- 
1834     The  Pernicious  Effects  of  Sea  Insurance.     London,  1834. 
1825     Tonnies,    P     D.    W. ;   Chronik    des    Hamburger   See-Assecuranz- 

Geschafts  im  Jahr  1824.     Hamburg,  1825. 
1823     Tonnies,  P.  D.  W. ;  Uber  Avarie-Grosse.     Hamburg,  1823. 
1850     Tuckett,  Harvey  G. ;  Practical  Remarks  on  the  Present  State  of 

Life  Insurance  in  the  United  States.     Phila.,  1850. 
1904     Vance,  William  Reynolds;  Handbook  of  the  Law  of  Insurance. 

St.  Paul,  Minn.,  1904. 
1859     Vetoes  of  the  Council  of  Revision  of  the  State  of  New  York,  by 

Alfred  B.  Street,  Albany,  1859.     (Ins.  p.  345-) 
1901     Wambaugh,   Eugene,  LL.   D.;  Selection  of  Cases  on  Insurance. 

Cambridge,  1901, 
1888     Wendt,    Ernest   Emil;   Papers  on   Maritime    Legislation,  with  a 

translation  of  the  German  Mercantile  Laws  relating  to  Mari- 
time Commerce.     London,  1888. 
1 781     Weskett,  John;  Complete  Digest  of  the  Theory,  Laws  and  Prac- 
tice of  Insurance.     London,  1781. 
1890     Willoughby,  Westel  W.;  The  Supreme  Court  of  the  United  States. 

Baltimore,  1890, 
1897     Williams,    Gomer;    History    of    the    Liverpool    Privateers    (with 

reference  to  Insurance).     London,  1897. 
191 1     Wucherverbots,    Einfiuss  des  kanonischen,    auf  die  Entwicklung 

der  Assekuranz;  by  Blumhardt,  Berlin,  Journal  of  the  (merman 

Society  for  Insurance  Science,  Jan.,  191 1. 


227 


CHAPTER  V. 

LIFE    INSURANCE    SUPERVISION  AND   GOVERNMENT 
CONTROL  IN   GERMANY* 

The  adequate  and  effective  supervision  and  regulation  by 
Government  of  insurance  corporations  is  one  of  the  most  im- 
portant and  complex  problems  in  political  science.  The  mag- 
nitude of  the  business,  and  its  intimate  relation  to  public  wel- 
fare, precludes  the  idea  of  a  let-alone  policy  of  government 
on  the  one  hand,  or  of  a  too  restrictive  policy  of  legislative 
interference  and  control  on  the  other.  The  latter  is  practically 
certain  in  the  long  run  to  do  a  vast  amount  of  permanent  harm. 
The  conflict  of  opinion  lies  between  these  two  extremes,  and 
as  an  admirable  compromise  the  insurance  legislation  of  Switz- 
erland, Austria  and  Germany  is  deserving  of  serious  and  critical 
consideration. 

Insurance  Legislation  in  Continental  Europe. 

The  insurance  laws  of  Switzerland  were  adopted  by  the 
Federal  Council  in  1885  and  they  have  remained  practically 
unchanged  during  the  intervening  twenty-two  years.  The 
Austrian  regulations  were  adopted  in  1896,  and  the  German 
code  in  1901.  These  codes  and  regulations  govern  the  business  of 
insurance  in  broad  outlines  upon  the  basic  principles  of  equity  and 

*  Address  delivered  at  the  Annual  Convention  of  Insurance  Commis- 
sioners held  in  Richmond,  Va.,  in  1906.  It  has  not  seemed  necessary 
to  bring  the  statistical  data  down  to  date  since  the  practice  of  the  Depart- 
ment has  undergone  no  material  change  in  the  meantime.  For  much 
of  the  information  contained  in  this  address  I  am  under  personal  obliga- 
tions to  the  President  of  the  Department,  Herr  Gnmer,  who,  on  several 
occasions  kindly  extended  to  me  the  courtesies  of  his  office,  to  facilitate 
my  inquiry  into  a  rather  difficult  branch  of  German  administrative  law. 

228 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

public  policy.  They  confer  great  powers  of  discretion  upon  the 
supervising  authorities,  while  providing  for  the  necessary  tech- 
nical and  practical  qualifications  in  the  supervising  officials. 
The  codes  contain  few  regulations  in  matters  of  administrative 
detail,  which  is  probably  the  chief  reason  why  in  practice  they 
have  been  so  generally  satisfactory  and  effective. 

The  German  Insurance  Code  op  1901. 

It  was  originally  my  intention  to  discuss  in  outline  the  in- 
surance legislation  of  the  three  countries  named,  but  after 
further  consideration  I  concluded  that  it  would  serve  a  more 
practical  purpose  to  limit  my  observations  to  the  insurance 
code  of  Germany.  While  the  code  has  been  translated  into 
English  in  the  consular  report  upon  "Insurance  in  Foreign 
Countries,"  (1905),  the  translation  is  crude,  and  in  matters 
of  detail  decidedly  unsatisfactory.  On  account  of  material 
differences  in  institutions  and  methods  of  government,  it  is 
a  somewhat  difficult  undertaking  to  present  the  essential  facts 
of  German  insurance  legislation  with  such  brevity  as  would 
be  desirable.  The  general  literature  of  the  subject  is  very 
extensive  and  upon  the  code  itself  about  a  dozen  commentaries 
had  appeared  within  less  than  two  years  after  the  law  went 
into  effect.  The  official  literature  is  also  very  considerable, 
including,  among  others,  five  annual  reports  upon  the  business 
operations  of  the  Department,  supplemented  by  three  statis- 
tical reports  and  some  twenty-three  elaborate  periodical  publi- 
cations issued  at  intervals  of  about  three  months,  and  many 
special  publications  of  the  Department.  Of  this  wealth  of 
information  and  experience  I  have,  of  necessity,  had  to  make 
an  arbitrary  selection  of  such  matters  as  seemed  to  me  to  be 
of  most  practical  value  as  a  slight  contribution  to  the  high 
aims  and  purposes  of  this  convention. 

Imperial  Supervision  and  Control  of  Interstate  Insurance. 

The  German  insurance  code  applies  to  the  whole  of  Germany, 
but  not  to  the  German  possessions  in  foreign  countries.  The 

239 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

law  applies  specifically  only  to  private  insurance  undertakings 
which  do  business  in  more  than  one  German  state,  or  in  a  Ger- 
man state  and  a  foreign  country.  The  separate  states,  however, 
may  arrange  with  the  Imperial  Supervising  Department,  estab- 
lished by  the  code  for  the  supervision  of  local  undertakings, 
and  some  of  the  smaller  states  have  already  done  so,  while  others 
are  expected  to  follow.  State  insurance  undertakings  in  any 
form  are  not  subject  to  the  code,  but  remain  subject  to  local 
laws  and  regulations.  The  compulsory  system  of  government 
insurance  is  also  outside  of  the  operations  of  the  code,  being 
governed  separately  by  the  Imperial  Insurance  Department, 
which  must  not  be  confused  with  the  Imperial  Supervising 
Department  of  Private  Insurance  Undertakings. 

Insurance  Companies  Considered  Commercial 
Undertakings. 

The  code  is  the  logical  result  of  more  than  forty  years 
of  public  agitation  for  certainty  and  uniformity  in  insurance 
legislation.  In  its  general  outlines  the  code  conforms  to  the 
commercial  law,  and  many  provisions  are  by  specific  reference 
adopted  from  the  commercial  code.  The  code  considers  insurance 
companies  from  practically  the  same  legal  and  administrative 
points  of  view  as  corporations  generally  and  while  previous 
to  its  adoption  mutual  companies  and  associations  did  not 
possess  the  rights  and  privileges  of  corporations,  this  defect 
in  the  law  was  corrected  by  the  code  of  1901.  The  code  does  not 
apply  to  marine  and  inland  insurance,  or  to  re-insurance  com- 
panies, upon  the  theory  that  these  undertakings  are  so  strictly 
commercial  in  character  and  purpose  that  the  commercial 
world  is  fully  competent  to  protect  itself  against  possible  mis- 
takes. Registered  Friendly  Societies  and  Miners*  Benefit  Funds 
are  also  outside  of  the  scope  of  the  code.  The  code  is  almost 
free  from  technicalities  and  is  readily  within  the  understanding 
of  anyone  with  a  fair  degree  of  intelligence. 

230 


supervision  and  government  control  in  germany 

Code  Limited  to  the  Administrative  Law  of  Insurance. 

The  code  is  limited  to  the  administrative,  or  public. 
law  of  insurance.  For  the  time  being  the  private,  or  contract, 
law  of  insurance  remains  subject  to  the  various  conflicting 
regulations  of  the  different  states,  but  a  code  has  been  framed 
after  extended  and  expert  consideration,  which  would  have 
passed  the  Imperial  Parliament  at  its  last  session  [1906]  but 
for  its  unexpected  dissolution.*  Similar  codifications  of  the 
private  law  of  insurance  are  under  consideration  in  Austria 
and  Switzerland.  The  distinction  between  the  administrative, 
or  public,  law  of  insurance,  and  the  private,  or  contract, 
law  is  vital,  and  there  is  practically  never  any  confusion  upon 
these  two  branches  of  legal  science  in  the  legislation  of  Euro- 
pean countries.  The  Germans  have  a  strong  inclination  for 
technical  excellence  in  the  codification  of  their  laws,  and  the 
insurance  code  represents  many  years  of  careful  inquiry  and 
consideration,  with  a  due  and  impartial  regard  to  all  of  the 
interests  affected  by  legislation  of  this  character. 

Insurance  an  Element  of  German  Constitutional  Law. 

The  code,  on  the  whole,  has  worked  well  in  practice,  to  the 
satisfaction  alike  of  the  Government,  the  insurance  companies, 
and  the  general  public.  There  have  been  no  changes  or  amend- 
ments to  the  law  during  the  five  and  a  half  years  since  the  same 
went  into  effect.  Every  provision  of  the  code  was  framed  upon 
the  best  obtainable  expert  and  impartial  advice.  Its  legislative 
history  is  a  credit  to  the  German  people,  who,  with  character- 
istic patience  and  thoroughness,  deliberated  long  but  wisely 
before  making  a  fundamental  law  to  henceforth  govern  so  vast 
and  important  a  social  institution  as  insurance.    The  code  also 

♦The  code  governing  the  contract  of  insurance  was  enacted  in  1908, 
and  in  its  entirety  the  same  went  into  effect  on  Jan.  i,  1910.  The 
code,  as  finally  adopted,  was  the  fifth  proposal,  the  first  having  been 
prepared  by  the  Imperial  Dep't  of  Justice  in  1903,  and  changed  and 
amended  proposals  having  been  introduced  into  the  Federal  Council  in 
1905  and  in  the  Imperial  Parliament  in  1907  and  1908. 

231 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

reflects  creditably  the  advancement  of  German  insurance  science 
in  its  legal,  administrative,  and  technical  departments.  The 
code  is  strictly  constitutional  legislation,  since  by  Article  4 
of  the  German  constitution  insurance  is  included  as  one  of  the 
interests  subject  to  imperial  law,  following  in  this  respect  the 
constitution  of  the  North  German  Confederacy  of  1866. 

Public  Interest  in  Insurance  Legislation. 

I  need  only  very  briefly  sketch  the  legislative  history  of  the 
code,  which,  however,  is  decidedly  instructive  as  illustrating 
the  method  pursued  to  combine  a  high  degree  of  technical 
perfection  in  matters  of  detail  with  efficiency  in  administration. 
After  many  years  of  public  discussion,  the  first  draft  of 
the  code  was  made  public  on  the  26th  of  November,  1898, 
and  immediately  attracted  universal  and  critical  attention. 
The  code  as  proposed  conformed  in  its  outlines  to  the  law 
as  subsequently  adopted,  but  many  important  changes  were 
found  necessary  and  made  in  due  consideration  and  after  ex- 
tended hearings  of  the  interests  affected.  Naturally,  there 
was  at  first  considerable  opposition  to  some  of  the  more  restric- 
tive provisions  of  the  code,  but  an  expression  of  expert  opinion 
was  solicited  from  all  in  a  position  to  make  practical  sugges- 
tions or  give  useful  advice.  How  universal  the  interest  in 
the  question  was,  and  how  strictly  commercial  the  point  of 
view,  is  best  illustrated  by  the  fact  that  in  addition  to  the 
national  societies  of  German  life  and  fire  insurance  companies, 
the  various  chambers  of  commerce  throughout  the  Empire  sub- 
mitted briefs  and  arguments.  Among  others  the  subject  was 
considered  in  detail  at  various  commercial  congresses  and  by 
the  Association  of  German  Agricultural  Interests,  followed  by 
resolutions  of  the  German  Bar  Association,  German  re-insurance 
companies,  English  life  insurance  companies,  German  liability 
insurance  companies,  and  by  an  elaborate  brief  presented  by 
the  Elders  of  the  Association  of  Berlin  Merchants.  The  facts 
and  arguments  submitted  by  these  bodies,  and  many  others, 
are  evidence  of  the  careful  and  impartial  consideration  which 

232 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

had  been  given  to  every  important  feature  of  the  proposed 
law  before  the  same  was  finally  adopted. 

Over  Two  Years  Allowed  for  Public  Discussion. 

Upon  this  basis  of  fact  and  information  the  Government 
introduced  a  revised  bill,  which  was  submitted  to  the  Imperial 
Parliament  on  the  14th  of  November,  1900.  In  other  words, 
nearly  two  years  were  allowed  for  public  argument  and  dis- 
cussion. Every  important  provision  of  the  law  was  discussed 
at  length,  and  with  remarkable  ability,  in  numerous  articles 
in  the  technical  insurance  press,  by  lawyers  of  the  highest 
standing,  and  by  prominent  economists  and  teachers  of  insur- 
ance science  in  German  universities.  The  Government  itself 
did  not  assume  an  attitude  of  hostility  toward  the  companies, 
nor  did  it  press  for  undue  haste  in  advancing  the  bill  through 
its  different  stages.  The  bill  was  read  for  the  first  time  on 
November  29,  1900,  and  referred  to  a  commission  of  twenty- 
one  members  for  further  consideration  and  report.  This  com- 
mission included  some  of  the  foremost  experts  in  insurance, 
and  during  its  twenty-six  sittings  every  interest  was  given  an 
opportunity  to  present  facts  and  arguments  for  or  against 
particular  provisions  of  the  law.  A  final  bill,  in  a  modified 
form,  was  submitted  to  the  Imperial  Parliament  on  April  20, 
1 90 1,  so  that  there  had  been  an  intervening  period  of  five  more 
months  for  further  public  argument  and  discussion. 

Code  Conforms  to  Expert  Opinion  and  Business 
Experience. 

The  report  of  the  commission  is  a  model  of  its  kind  and 
deserving  of  the  most  careful  study  and  reflection  by  all  who 
would  like  to  see  the  conflicting  statutory  requirements  in  this 
country  upon  the  subject  of  insurance  harmonized,  to  the 
decided  advantage  of  the  insurance  companies,  their  policy- 
holders and  the  state.  In  the  final  report  of  the  commission 
every  section  of  the  proposed  law  is  fully  explained,  not  only 
in  its  immediate  bearings  upon  the  subject  under  consideration, 

233 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

but  in  its  important  relations  to  existing  codes  of  commerce, 
bankruptcy,  civil  rights,  crimes,  etc.  The  arguments  for  and 
against  particular  provisions  are  printed  in  sufficient  detail  to 
afford  an  insight  into  the  facts  and  principles  governing  par- 
ticular provisions  of  the  law.  The  code  as  finally  revised  was 
submitted  to  the  Reichstag  during  the  latter  part  of  April,  and 
became  a  law  on  May  12,  1901.  The  law  became  effective  on 
January  i,  1902,  except  such  provisions  as  related  to  the  organi- 
zation, etc.,  of  the  Imperial  Supervising  Insurance  Department 
established  by  the  code,  which  went  into  effect  upon  its  passage. 

Scope   and  Purpose   of  the   Imperial  Supervising  Insur- 
ance Department. 

The  code  is  arranged  in  nine  general  sections  and  125 
paragraphs.  Important  supplementary  regulations  were  issued 
by  the  Federal  Council,  and  approved  by  the  Emperor,  under 
date  of  December  23,  1901,  which  in  thirty-six  sections,  govern 
the  appointments  and  administration  of  the  Imperial  Super- 
vising Department  established  by  the  code.  The  first  section 
is  general  and  defines  the  scope  and  purpose  of  the  law.  The 
Imperial  Supervising  Department  has  complete  control  over 
everything  directly  or  indirectly  appertaining  to  the  methods, 
management,  or  experience  of  the  companies  and  associations 
subject  to  its  jurisdiction.  The  supreme  power  of  the  Depart- 
ment rests  primarily  upon  the  exclusive  right  to  grant  authority 
for  the  transaction  and  continuance  of  business.  The  rights 
and  duties  of  the  companies  or  undertakings  are,  however, 
clearly  defined  by  the  code,  and  except  for  specific  reasons  the 
Department  must  issue  the  permission,  or  what,  for  want  of  a 
better  term,  may  be  spoken  of  as  a  license  to  carry  on  the 
business  of  insurance. 

Discretionary  Powers  of  the  Department. 

Insurance  undertakings,  to  obtain  authority  to  transact 
business,  must  submit  to  the  Department  a  complete  state- 
ment of  facts  and  information  to  clearly  establish  the  nature 

234 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

and  purpose  of  the  business  to  be  transacted.  The  Depart- 
ment can  decline  to  approve  the  application  only  when  there 
is  evidence  (i)  that  the  business  plan  is  contrary  to  the  law; 
(2)  that  the  undertaking,  for  one  of  many  reasons,  may  not 
be  able  to  carry  out  its  intentions  or  meet  its  present  or 
future  obligations;  (3)  when  the  proposed  plan  or  method 
of  insurance  is  contrary  to  public  policy.  To  make  sure  that 
these  requirements  are  complied  with  in  all  cases,  a  thor- 
ough preliminary  investigation  is  made  by  the  Department 
into  all  the  facts  presented,  the  object  being,  of  course,  to 
eliminate,  if  possible,  at  the  very  outset,  inherently  weak  or 
possibly  fraudulent  insurance  undertakings.  In  this  respect 
the  Department  has  been  eminently  successful.  If  a  similar 
method  were  followed  in  the  United  States,  every  application 
for  a  new  insurance  charter  would  first  have  to  be  approved 
by  the  superintendent  or  commissioner  of  insurance.  The 
provision  of  the  German  code  is  decidedly  effective  to  eliminate 
wildcat,  speculative,  and  fraudulent  insurance  enterprises. 

Safeguarding  Policyholders*  Rights  and  Privileges. 

As  a  further  condition  precedent  to  the  required  authority 
to  transact  business,  the  code  defines  the  principles  which 
must  govern  in  the  articles  of  incorporation  or  association  and 
in  the  policy  conditions.  These  may  briefly  be  defined  as 
emphasizing  the  necessity  for  a  clear  and  specific  statement 
of  the  respective  rights  and  duties  of  the  insuring  company 
on  the  one  hand,  and  of  the  insured  policyholder  on  the  other. 
The  object,  of  course,  is  to  provide  both  the  stockholder  and 
the  policyholder  with  a  readily  understood  statement  of  the 
conditions  governing  their  relations  to  the  company  or  associa- 
tion. No  standard  forms,  however  are,  prescribed,  nor  is  there 
an  attempt  at  uniform  regulation  of  the  details  of  specific  policy 
conditions.  The  law  permits  of  a  deviation  from  the  general 
insurance  conditions,  but  in  cases  where  such  changes  may  be 
construed  as  being  contrary  to  the  interest  of  the  insured,  as, 
for  illustration,  in  the  earthquake  clause,  the  same  must  be 

235 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

clearly  and  fully  explained  for  the  information  of  the  policy- 
holder, in  which  event  the  contract  may  be  issued.  In  other 
words,  there  is  no  interference  with  contractual  freedom  on 
the  one  hand  or  with  the  liberty  of  legitimate  business  enter- 
prise on  the  other.  Before  a  contract  of  insurance  can  go  into 
effect  a  separate  copy  of  the  policy  conditions  must  be  handed 
to  the  prospective  policyholder,  who  must  give  a  receipt  there- 
for in  writing.  This  requirement,  however,  does  not  apply 
to  open  policies  of  insurance  issued  in  conformity  to  the  prac- 
tice of  the  Stock  Exchange,  the  rules  of  which  are  applicable 
to  strictly  commercial  agreements  of  this  character. 

Special  Requirements  of  Life  Insurance  Companies. 

On  account  of  the  more  complex  nature  of  the  life 
insurance  business,  the  code  provides  in  detail  for  the  safe- 
guarding of  policyholders'  rights,  privileges,  and  interests. 
The  business  plan  of  a  life  insurance  company  or  association 
is  defined  to  include  the  premium  rates  and  the  principles  of 
their  calculation,  the  rate  of  interest,  and  the  loading  of  the 
net  premium.  No  specific  table  of  mortality  is  required,  nor 
a  specific  minimum  or  maximum  rate  of  interest.  The  use 
of  the  preliminary-term  method  is  permissible  for  the  first 
year  to  the  extent  of  $12.50  per  $1,000  of  insurance.  The 
mortality  table  used  in  the  calculations  is  required  to  be  stated, 
and  the  same  is  true  of  tables  bearing  upon  the  probability  of 
accident,  liability,  and  sickness.  Every  division  of  the  life 
insurance  business,  such  as  endowment,  limited  payment  life, 
annuities,  etc.,  must  be  explained  in  detail  as  to  the  formulas 
used  in  the  calculation  of  premium  rates  and  dividend  appor- 
tionments, illustrated  by  examples  in  figures.  If  policies  are 
issued  at  a  higher  premium,  the  business  plan  must  show  why, 
and  on  what  principle,  a  special  premium  is  to  be  charged. 

Continuous  and  Complete  Supervision. 

The  aim  of  the  law  is  to  provide  the  Supervising  Depart- 
ment with  all  the  necessary  information  to  pass  upon  the  in- 

236 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

trinsic  value  of  the  proposed  insurance  undertaking.  The 
Department  is  fully  equipped  with  experts  of  the  highest  stand- 
ing to  render  an  impartial  and  trustworthy  opinion  upon  the 
equity  or  technical  soundness  of  proposed  plans  for  insurance. 
All  subsequent  changes  in  the  articles  of  association,  or  the 
policy  conditions,  or  the  business  plan  of  the  company,  require 
the  approval  of  the  supervising  authorities  before  the  same  can 
legally  go  into  effect.  As  previously  stated,  the  Department 
can  decline  to  give  its  approval  only  upon  the  principles  of 
equity,  safety  and  public  policy.  In  other  words,  the  aim  of 
the  code  clearly  is  to  secure  the  highest  degree  of  perfection  in 
supervision  as  a  basis  of  rational  governmental  regulation  and 
control.  There  is  no  attempt  to  substitute,  even  in  principle, 
State  management  of  insurance  undertakings  on  the  one  hand, 
or  State  responsibility  for  the  fulfillment  of  contract  obligations 
on  the  other.  The  Government  interferes  only  in  cases  where 
there  is  evidence  that  the  insurance  undertakings  are  managed 
contrary  to   sound  principles  of  equity  and    pubHc   policy. 

Organization  op  the  Department. 

The  Department  has  supervision  over  the  entire  business 
of  insurance  corporations  and  associations,  and  under  the  term, 
business  plan,  or  method,  is  comprehended  everything  relating 
to  the  administration  and  the  results  of  business  experience. 
The  domicile  of  the  Department  is  at  Berlin,  where  it  is  housed 
in  a  beautiful  building  especially  erected  for  the  purpose.  The 
executive  organization  consists  of  a  president,  a  chief  director, 
five  permanent  members  in  the  main  department,  four  per- 
manent members  in  the  auxiliary  department,  and  three  ex- 
officio  members  who  are  technically  qualified  experts  in  insur- 
ance. The  technical  and  clerical  staffs  of  the  Department 
consist  of  some  thirty  employees.  All  of  the  appointments 
are  of  men  thoroughly  conversant  with  either  the  theory  or 
practice  of  the  business  in  any  one  or  more  of  its  different 
branches,  and  except  in  the  case  of  ex-officio  members,  the 
appointments  are  for  life.    The  salaries  paid  may  be  considered 

237 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

fairly  commensurate  with  the  very  responsible  duties  dis- 
charged. All  officers  and  employees  are  entitled  to  a  pension 
in  old  age. 

Department    is    an    Independent    Administrative-Judicial 
Branch  of  the  Government. 

The  status  of  the  Department  is  that  of  one  of  the  superior 
courts,  and  its  functions  are  both  administrative  and  judicial. 
Specific  rules  of  procedure  govern  the  Department  in  practi- 
cally all  important  details.  The  Insurance  Department  forms 
a  subordinate,  but  practically  independent,  branch  of  the 
Department  of  the  Interior.  Persons  connected  in  an  official 
capacity  with  State  insurance  undertakings  are  not  eligible  to 
office  in  the  Department.  To  facilitate  the  administrative 
functions  of  the  Department  the  appointment  of  local  com- 
missioners is  permissible,  but  these  officials  do  not  exercise 
independent  functions.  They  are  supposed  to  act  in  an  advi- 
sory capacity  to  both  the  insurance  companies  and  the  Depart- 
ment. Thus  far  a  very  limited  use  has  been  made  of  this 
provision  of  the  code. 

Department  Assisted  by  Advisory  Council  of  Insurance 
Managers  and  Experts. 

For  the  purpose  of  increasing  the  efficiency  of  the  Depart- 
ment, and  to  secure  to  its  decisions  absolute  impartiality  in 
complicated  or  involved  cases,  the  code  provides  for  the  appoint- 
ment of  an  Advisory  Council  consisting  of  recognized  experts 
in  the  theory  and  practice  of  insurance.  The  Council  consists 
of  not  less  than  forty  members,  who,  if  necessity  requires,  may, 
upon  the  request  of  the  Imperial  Chancellor,  be  increased  to 
sixty  by  the  Federal  Council,  They  are  appointed  by  the 
Federal  Council  for  a  period  of  five  years,  subject  to  the  appro- 
val of  the  Emperor.  Their  duties  are  specifically  defined  in 
the  code,  the  main  object  being  to  secure  an  outside,  but  thor- 
oughly qualified,  expression  of  opinion  upon  complicated  and 
difficult   questions,   chiefly   such   as   require   to  be  considered 

238 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

under  the  provision  of  the  code  relating  to  the  right  of  appeal. 
The  members  of  the  Council  have  a  right  to  vote  in  specified 
cases,  but  they  can  be  brought  into  the  consideration  of  pend- 
ing questions  only  upon  the  request  of  the  president  of  the 
Imperial  Supervising  Department. 

Organization  of  the  Advisory  Council. 

The  Advisory  Council  is  divided  into  five  groups:     (i)  Life 
and  sickness  insurance;    (2)   accident  and  liability  insurance; 

(3)  live-stock,  hail  and  other  forms  of  agricultural  insurance; 

(4)  fire  insurance,  including  wind-storm,  water-damage,  and 
burglary  insurance,  and  (5)  all  other  brances  of  insurance  or 
matters  of  a  general  character.  The  members  of  the  Advisory 
Council  may  be  appointed  to  more  than  one  of  the  five  groups. 
As  illustrating  the  high  character  and  pre-eminent  qualifica- 
tions of  the  appointees  to  the  Advisory  Council,  I  may  mention 
among  others.  Dr.  Ehrenberg,  a  professor  of  insurance  in  the 
University  of  Gottingen  and  one  of  the  foremost  authorities 
on  insurance  theory  in  Germany;  Dr.  Emminghaus,  a  director 
of  the  Gotha,  the  foremost  mutual  life  insurance  society  in 
Germany;  the  late  Dr.  Hahn,  a  general  director  of  a  prominent 
company,  president  of  the  German  Society  for  Insurance  Science, 
and  president  of  the  Fifth  International  Actuarial  Congress; 
also  Dr.  Karup,  actuary  and  mathematician  of  the  Gotha  and 
one  of  the  highest  authorities  in  actuarial  science  in  the  world. 
All  the  other  members  of  the  Advisory  Council  are,  in  one 
capacity  or  another,  identified  with  insurance  companies  or 
insurance  interests.  The  members  of  the  Council  hold  their 
positions  as  an  honorary  employment,  but  they  are  reimbursed 
for  their  expenses  if  required  to  attend  meetings  at  the  office 
of  the  Department  in  Berlin.  At  all  meetings  the  president  of 
the  Department,  or  his  representative,  presides. 

Departmental,  Rulings,  not  Subject  to  Appeal. 

Against  the  decisions  of  the  Department,  as  such,  or  of 
the   Department   in   conjunction   with   the   Advisory   Council, 

239 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMNAY 

there  is  practically  no  appeal,  except  in  so  far  that  in  important 
cases  a  rehearing  will  be  granted,  at  which,  however,  the  presi- 
dent of  the  Department  is  again  the  presiding  officer,  but  from 
which  other  executive  officers  of  the  Department  are  excluded 
if  they  participated  in  the  previous  decision.  Upon  request, 
in  very  important  cases,  the  Advisory  Council  participates  in 
such  cases,  sitting  as  a  court  of  appeal,  whose  decision  is  final. 
The  fundamental  principle  which  underlies  this  apparently 
somewhatarbitrary  method  of  procedure,  is  that  even  the  general 
superior  courts  would  not,  as  a  rule,  be  in  a  better  position  to  render 
justice  than  a  special  court,  constituted  from  within  the  De- 
partment, and  sustained  by  an  Advisory  Council  derived  by 
careful  selection  from  among  the  most  qualified  experts  in  the 
business  of  insurance.  On  the  whole,  in  view  of  some  eight 
years  of  actual  experience,  it  may  be  held  that  the  results  have 
met  with  general  approval,  and  the  decisions  of  the  Depart- 
ment have  been  in  strict  conformity  to  rational  principles  of 
procedure  applied  to  a  highly  complex  and  involved  branch 
of  business  enterprise. 

Effective  Supervision  at  Minimum  Cost. 

The  expenses  of  the  Department  are  provided  for  by  the 
general  budget.  However,  upon  the  theory  that  it  is  equally 
to  the  interest  of  the  companies  and  their  policyholders,  as  well 
as  of  the  public  generally,  that  the  business  should  be  effectively 
supervised  and  regulated  by  the  Government,  an  annual  pro 
rata  levy  is  made  by  the  Department  upon  the  companies, 
subject  to  its  jurisdiction,  for  one-half  the  sum  required  for 
its  maintenance  during  the  current  year.*     The  contributions 

♦During  1906  the  expenses  of  the  Department  paid  by  the  companies 
were  assessed  upon  a  premium  income  of  713,625,000  marks.  The 
amount  paid  was  210,500  marks  or  at  the  rate  of  not  quite  30c.  per 
$1,000  of  gross  premium  income.  The  previous  year  the  rate  was  0.298 
(1905),  0.292  (1904,  0.277  (^^903)  and  0.235  (1902).  During  1909  the 
expenses  were  assessed  upon  a  premium  income  of  900,  838,  631  marks, 
and  the  amount  paid  was  271,800  marks,  or  30.2  cents  per  $1,000  of 
gross  premium  income.     In  1908  the  rate  was  0.289. 

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SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

or  fees  are  calculated  upon  the  previous  year's  gross  prem- 
ium income,  deducting  therefrom  premiums  paid  in  advance  and 
amounts  returned  to  shareholders  or  policyholders  as  profits 
or  dividends.  The  expenses  which  may  be  assessed  upon  a 
company,  however,  are  limited  to  a  maximum  of  one-tenth  of 
one  per  cent,  of  the  gross  premium  income  as  previously  defined. 
There  are  no  other  fees  or  charges  of  any  kind,  except  that  in 
cases  where  needless  expenses  have  been  incurred  by  the  De- 
partment in  behalf  of  special  efforts  to  secure  evidence  or  proof 
in  the  settlement  of  disputes  or  appeals,  the  charges  may  be 
assessed  upon  the  complainant. 

Legal  Status  of  Mutual  Insurance  Undertakings. 

The  organization  and  management  of  mutual  insurance 
undertakings  take  up  nearly  one-third  of  the  code,  and  for  the 
first  time  these  companies  in  Germany  have  secured  by  statute 
the  recognition  of  legal  corporations  entitled  to  the  same  judi- 
cial rights  and  privileges  as  incorporated  stock  companies. 
Incorporated  trade  unions  having  insurance  features,  miners' 
benefit  funds,  and  friendly  societies  do  not  come  within  the 
provisions  of  the  code.  As  a  general  principle,  the  provisions 
of  the  commercial  code  applicable  to  corporations  generally  are 
extended  to  mutual  insurance  undertakings.  In  future,  however, 
all  such  companies  or  associations  must  conform  to  uniform 
rules  laid  down  by  the  code  and  elaborated  by  the  Super- 
vising Department. 

Regulations  Governing  Mutual  Insurance. 

The  organization  of  mutual  undertakings,  their  manage- 
ment, election  of  officers,  etc.,  are  provided  for  by  the  code 
in  a  general  way  and  without  needless  interference  in  matters 
of  detail.  All  essentials,  including  the  distribution  of  surplus 
to  members  and  the  payment  of  special  compensation  to  the 
management,  are  governed  by  the  commercial  code  the  same  as 
when  appHed  to  stock  corporations.  The  regulations  are  admir- 
ably framed  and  have  been  universally  commended  and  ap- 

241 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

proved  by  insurance  interests  generally.  In  the  case  of  new 
organizations  the  code  requires  a  special  guarantee  fund  for 
the  additional  protection  of  the  members,  but  provision  is 
made  for  its  gradual  elimination. 

Under  the  provisions  of  the  commercial  code  which  apply 
to  the  insurance  code,  mutual  companies  or  associations  can 
be  converted  into  stock  companies  by  consent  of  the  policy- 
holders. In  practice  there  have  been  a  number  of  such  changes, 
with  the  approval  of  the  Supervising  Department,  while  to 
the  contrary  there  never  has  been  a  case  of  a  stock  company 
being  converted  into  a  mutual  institution.  Qualified  critics 
of  these  provisions  of  the  code  have  not  failed  to  point  out  the 
inherent  difficulties  of  actual  participation  in  the  management 
through  the  membership,  and  on  the  whole,  official  as  well 
as  private  opinion  in  Germany  seems  to  decidedly  favor  stock 
corporations.  In  actual  practice  there  has  been  no  participation, 
nor  even  a  serious  interest  of  policyholders,  in  the  management 
of  large  mutual  insurance  undertakings,  for,  as  has  been  prop- 
erly pointed  out,  the  members  consider  chiefly  their  contractual 
relations  to  the  company  or  association  as  policyholders  and 
not  as  members  or  partners  in  a  commercial  enterprise. 

Legal  Status  of  Stock  Companies. 

The  legal  status  of  stock  life  insurance  companies  is  in 
part  governed  by  the  insurance  code  and  in  part  by  the  general 
stock  corporation  law.  For  the  adequate  protection  of  stock- 
holders the  companies  are  required  to  gradually  accumulate 
a  reserve  out  of  profits  otherwise  unassigned.  This  reserve  is 
in  the  nature  of  a  stock  dividend  required  by  the  stock  cor- 
poration law,  applicable  to  life  insurance  companies.  At  least 
five  per  cent  of  the  annual  net  profits  must  be  set  aside  until 
the  capital  reserve  equals  ten  per  cent,  of  the  amount  author- 
ized. It  has  been  the  general  rule  for  many  years,  in  the  forma- 
tion of  stock  life  insurance  companies,  to  pay  in  about  twenty 
per  cent,  of  the  authorized  capital  in  cash,  while  for  the  re- 
mainder the  personal  notes  of  the  stockholders  are  required  to  be 

242 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

deposited  and  made  payable  on  demand.  The  intrinsic  value 
of  the  notes  must  be  periodically  verified.  In  proportion,  of 
course,  as  the  capital  reserve  increases  the  individual  liability 
of  stockholders  for  the  unpaid  portion  of  their  stock  diminishes. 
This  arrangement  is  covered  by  Section  262  of  the  commercial 
code,  and  a  somewhat  similar  arrangement  provides  for  the 
guaranty  funds  of  mutual  companies  by  Section  37  of  tha 
insurance  code. 

Dividends  Paid  by  German  Stock  Life  Insurance 
Companies. 

The  annual  business  report  of  the  Department  for  1906 
includes  some  very  interesting  details  regarding  the  author- 
ized and  paid-up  capital,  stock  reserve  funds,  and  dividends 
paid  to  shareholders  by  German  stock  life  insurance  compa- 
nies in  part  as  follows: 

There  were  twenty-four  stock  companies,  or  so-called  large 
undertakings,  which  had  about  1,400,000  ordinary  policies  in 
force,  and  a  total  income  during  1906,  of  303,272,000  marks 
($72,178,736)..  The  authorized  stock  capital  of  these  companies 
was  in  round  figures,  156,000,000  marks  ($37,128,000),  of 
which,  as  far  as  it  is  possible  to  judge,  only  35,000,000  marks 
($8,330,000)  was  paid  in  cash.  For  the  unpaid  balance  of  the 
authorized  capital  the  shareholders  are  required  to  deposit 
fully  secured  personal  notes  payable  on  demand.  For  these, 
of  course,  they  would  become  liable  only  in  the  event  of  failure. 
The  commercial  code  requires  the  gradual  accumulation  of  a 
stockholders'  reserve  equal  to  ten  per  cent,  of  the  authorized 
capital  out  of  profits  not  otherwise  assigned,  and  something 
over  14,000,000  marks  ($3,332,000)  has  been  set  aside  for  this 
purpose.  Stock  dividends  are  paid  upon  both  the  cash  and  the 
stock  reserve,  and  in  the  aggregate  during  1906  the  twenty- 
four  companies  paid  6,060,000  marks  ($1,442,280)  as  dividends, 
equal  to  about  17.3  per  cent,  of  the  cash  paid  in,  and  12.4  per 
cent,  when  the  stock  reserve  is  included. 

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supervision  and  government  control  in  germany 

Shareholders'  Participation  in  Profits. 
I  can  not  do  better  than  use,  for  purposes  of  illustration, 
the  case  of  a  company  selected  at  random,  with  an  authorized 
capital  of  9,000,000  marks  ($2,142,000).  Of  this  sum,  twenty  per 
cent,  was  actually  paid  in  cash,  while  for  the  remainder  the 
required  demand  notes  were  deposited.  In  the  course  of  years 
the  company  has  accumulated  a  capital  reserve  of  900,000 
marks  ($214,200),  or  the  full  legal  limit  of  ten  per  cent,  of  the 
authorized  capital  stock.  Combining  the  amount  paid  in  cash 
and  the  capital  stock  reserve  authorized,  the  total  is  2,700,000 
marks  ($642,600),  and  upon  this  sum  the  company,  during  1904, 
paid  a  cash  dividend  of  ten  per  cent.,  or  270,000  marks  ($64,260). 
The  equivalent  payment  upon  the  cash  actually  paid  in  would 
be  fifteen  per  cent.  Another  company,  with  an  authorized 
capital  stock  of  17,142,000  marks  ($4,079,796),  of  which  only 
ten  per  cent.,  or  1,714,000  marks  ($407,932)  had  been  paid  in 
cash,  and  which  has  accumulated  a  stock  reserve  of  1,714,000 
marks  ($407,932)  more,  paid  during  1904  the  sum  of  500,000 
marks  ($119,000  )in  cash  dividends  to  shareholders,  or  at  the 
rate  of  14.6  per  cent,  upon  the  aggregate  present  cash  capital, 
or  29.2  per  cent,  upon  the  amount  of  cash  actually  paid  in. 

Companies  May  Pay  Any  Rate  op  Profit  Actually 

Earned. 

The  companies  may  pay  any  rate  of  profit  provided  the 
same  is  actually  earned.  The  Supervising  Department  con- 
siders its  duty  at  an  end  if  it  has  been  furnished  with  conclusive 
evidence  that  the  amount  paid  in  cash  dividends  to  shareholders 
is  actually  available  and  has  not  been  derived  from  other  funds 
than  the  balance  of  net  profits  remaining  after  the  payment  of 
all  other  obligations.  The  code  does  not  restrict  the  companies 
in  this  respect  since  stock  life  insurance  companies  are  con- 
sidered from  the  same  point  of  view  as  other  commercial  under- 
takings. In  other  words,  if  by  reason  of  exceptional  gain  or 
profits  resulting  from  executive  or  scientific  methods  of  manage- 
ment, a  balance  of  funds  becomes  available  for  distribution  to 

244 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

the  shareholders,  the  law  does  not  fix  a  maximum  rate  of  profit 
which  may  be  realized  upon  the  investments.  There  is  in  this  re- 
spect, complete  freedom  of  trade  in  life  insurance  the  same  as 
in   other  business  enterprises. 

Stock  and  Mutual  Companies  May  Transact  Participating 
AND  Non-Participating  Business. 

The  code  does  not  prohibit  life  insurance  companies  from 
transacting  both  a  participating  and  a  non-participating  busi- 
ness. As  a  rule,  German  companies  issue  both  classes  of  policies, 
but  the  participating  business  predominates.  In  1904,  of  the 
policies  payable  in  the  event  of  death,  in  force  with  German 
stock  companies,  82.9  per  cent,  were  on  the  participating  plan 
and  with  mutual  companies  99.4  per  cent.*  Mutual  companies 
are  permitted  to  issue  non-participating  policies,  but  the  policy- 
holders in  such  cases  are  not  considered  members.  The  non- 
participating  rates  are,  as  a  rule,  higher  than  the  corresponding 
rates  charged  by  American  or  English  companies.  Of  the  policies 
issued  on  the  endowment  plan,  with  stock  companies,  only 
thirty -two  per  cent,  were  on  the  participating  plan,  and  with 
mutual  companies,  ninety-two  per  cent.  As  a  rule,  German 
mutual  companies  do  not  sell  annuity  contracts,  but  such  as 
have  been  issued,  with  either  stock  or  mutual  companies,  are 
nearly  all  on  the  non-participating  plan. 

Status  of  Foreign  Insurance  Companies. 

Foreign  insurance  companies  transacting  business  in  Ger- 
many are  subject  to  a  separate  division  of  the  code,  in  seven 
sections.  All  such  companies  require  permission  or  authority 
from  the  Department  the  same  as  domestic  companies,  but 
the  final  action  of  the  Department  is  subject  to  approval  by  the 
Imperial  Chancellor.     This  distinction,  of  course,   rests   upon 

*  The  29  companies  transacting  life  insurance  in  the  State  of  Massa- 
chusetts had,  in  the  aggregate,  $13,753,542,000  of  insurance  in  force, 
Dec.  31,  1909.  Of  that  amount  $10,190,724,000,  or  74.1  per  cent,  was 
participating  and  $3,562,818,000,  or  25.9  per  cent,  was  nonparticipating. 

245 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

certain  principles  of  international  law  and  the  practice  of  the 
Department  of  foreign  affairs  in  its  relations  to  the  Governments 
of  other  countries.  The  conditions  of  admission,  however,  are 
practically  the  same  as  in  the  case  of  domestic  companies,  but 
the  foreign  company  must  appoint  a  representative  with  full 
power  of  attorney  to  act  for  it  in  an  official  capacity  in  all  cases, 
including  the  signing  of  policy  contracts  and  accepting  service 
in  the  case  of  legal  complications.  The  company  must  estab- 
lish a  chief  domicile  in  some  one  state,  and  in  all  its  civil  relations 
in  questions  arising  out  of  the  insurance  contract  it  becomes 
subject  to  the  local  law.  The  company  is  also  subject  to  the 
jurisdiction  of  the  local  courts  in  the  first  instance,  and  it  is  not 
permitted  to  waive  this  jurisdiction  even  by  special  agreement 
with  the  local  government.  The  premium  reserve  which  is  prop- 
erly chargeable  against  the  business  of  foreign  life  insurance  com- 
panies transacting  insurance  in  Germany  must  be  kept  and 
invested  in  Germany  in  such  a  manner  that  it  can  be  disposed 
of  only  by  permission  or  authority  of  the  Department.  The 
practical  problems  arising  out  of  this  provision  of  the  law  have 
not  as  yet  been  fully  settled  or  determined. 

Insurance  as  a  Problem  in  International  Law. 

In  its  relation  to  foreign  life  insurance  companies  the  De- 
partment, has,  on  the  whole,  been  fairly  tolerant  and  adjusted 
its  requirements  in  the  form  of  a  reasonable  compromise  best 
adapted  to  meet  the  necessities  of  an  exceptional  situation. 
To  leave  free  scope  to  the  Government,  however,  in  its  relations 
to  foreign  powers,  the  Federal  Council  and  the  Imperial  Chan- 
cellor are  specifically  authorized  to  act  entirely  according  to 
their  own  discretion  with  respect  to  the  granting  of  a  concession 
or  license  to  a  foreign  company  transacting  business  in  the 
German  Empire.  The  Department,  by  implication,  at  least, 
would  seem  to  have  the  right,  and  possibly  the  duty,  of  extending 
its  supervisory  powers  into  the  domestic  affairs  of  a  foreign 
company,  including  an  actual  investigation  into  its  condition 
at  its  home  office.     Treaty  obligations  between  Germany  and 

246 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

foreign  powers  respecting  a  reciprocal  arrangement  regarding 
insurance  companies  are  not  affected  by  the  law,  and  they  may, 
therefore,  be  made  entirely  in  the  discretion  of  the  Government. 
Insurance  is  therefore  strictly  recognized  as  an  element  of  com- 
merce and  being  subject  to  the  control  of  the  foreign  office, 
it  is  governed  in  this  respect  by  the  principles  of  inter- 
national law. 

Adequate  Fines  and  Penalties. 

The  provisions  of  the  code  are  adequate  with  respect  to 
the  necessary  penalties  for  non-compliance  with  the  law  or  the 
rules  and  regulations  of  the  Supervising  Department.  In  all 
essentials  these  conform  to  the  established  rules  of  procedure 
in  criminal  cases  arising  under  the  general  civil  and  penal  codes. 
Deliberately  false  or  misleading  statements  to  secure  a  conces- 
sion or  permission  to  do  business,  or  for  the  purpose  of  obtaining 
the  approval  of  the  Department  in  matters  for  which  it  is 
required,  are  punishable  with  imprisonment  or  a  fine  to  the 
amount  of  about  $5,000,  while  in  addition  the  court  can  impose 
the  loss  of  civil  rights.  Deliberately  false  or  misleading  state- 
ments regarding  the  funds  of  the  company,  or  the  character  of 
its  assets,  or  when,  contrary  to  law,  a  division  of  profits  to  the 
insured  or  to  the  shareholders  has  taken  place,  or  false  keeping 
of  books  and  accounts,  or  the  investment  and  keeping  of  the 
premium  reserve  contrary  to  law,  is  punishable  with  imprison- 
ment for  not  more  than  six  months,  or  a  fine  of  not  more  than 
$500,  or  both. 

Departmental  Powers  Over  Management. 

It  is  only  with  respect  to  life  insurance  undertakings  that 
the  code  contains  specific  regulations  for  the  general  business 
conduct  of  the  companies.  The  most  important  of  these  relate 
to  the  reserve  and  the  investments.  To  prevent  speculation 
in  real  estate  acquired  for  corporation  purposes,  the  purchase 
of  additional  properties  requires  the  approval  of  the  Department 
except  such  as  are  necessarily  acquired  under  foreclosure  pro- 

247 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

ceedings.  It  is  also  held  that  the  object  of  the  law  is  to  pre- 
vent the  erection  of  expensive  buildings,  chiefly  for  adver- 
tising purposes.  Should  the  Department  refuse  its  consent  to 
the  purchase,  the  company  has  not  the  right  of  appeal.  Foreign 
companies,  in  this  respect,  are  under  a  double  disadvantage, 
partly  for  the  reasons  stated,  and  partly  for  additional  political 
reasons  which  oppose  the  acquisition  of  real  estate  by  aliens. 

Departmental  Powers  Over  Records   and  Accounts. 

To  place  the  Supervising  Department  in  a  proper  position 
to  secure  all  the  information  required  in  the  opinion  of  its 
experts  to  arrive  at  a  necessary  conclusion,  the  code  extends 
to  it  every  power,  judicial  as  well  as  administrative,  to  secure 
the  end  in  view.  The  Department  has  the  right  to  examine 
into  all  the  books,  papers,  vouchers,  etc.,  of  a  company  which 
may  bear  upon  its  investments  or  upon  any  other  question, 
and  it  can  demand  information  from  any  one  of  the  employees, 
including  agents,  with  respect  to  any  material  fact  of  admin- 
istration. 

Departmental  Representation  at  Board  Meetings  op 
Mutual  Insurance  Undertakings. 

The  code  extends  to  the  Supervising  Department  the  right 
to  be  represented  at  the  meetings  of  directors  or  trustees  of 
mutual  insurance  undertakings  by  an  officer  of  the  Department 
and  should  it  be  necessary  for  special  reasons,  a  meeting  of  the 
directors  or  trustees  may  be  called  by  the  Department,  but 
at  such  meetings  the  Government  representative  presides 
over  the  proceedings.  In  practice  the  Department  has  not 
made  much  use  of  this  provision  of  the  law,  and  as  far  as  I 
am  informed,  only  in  the  case  of  mutual  insurance  companies. 
To  carry  this  principle  into  execution  in  the  case  of  many, 
or  all  of  the  insurance  undertakings  subject  to  its  super- 
visory powers,  would,  of  course,  be  impossible  with  the  present 
organization. 

248 


supervision  and  government  control  in  germany 

Discretionary  Powers  in  Cases  op  Complaint. 

The  Department  may  entertain  complaints  against  insur- 
ance companies,  but  it  is  under  no  specific  obligation  to  take 
action  in  such  matters.  It  is  admitted  by  the  authorities,  and 
the  experience  of  the  Department  has  verified  this  view,  that 
such  complaints  are  usually  of  an  extremely  trivial  character 
or  entirely  without  legal  foundation.  Most  of  these  complaints, 
it  is  pointed  out,  arise  in  connection  with  the  cash  surrender 
values  of  life  insurance  policies,  where  the  practice  of  the  com- 
pany is  sometimes  unintelHgible  to  the  insured.  Upon  inquiry  it 
is  usually  found  that  the  company  has  acted  within  its  rights  and 
according  to  the  policy  provisions,  which  of  course,  had  been 
previously  approved  by  the  Department.  Since  most  of  such 
complaints  arise  out  of  the  contractual  relations  between  the 
insured  and  the  company,  they  remain  subject  to  adjudication 
by  the  civil  courts. 

Annual  Statements  and  Reports  Required  to  be  Made. 

The  companies  must  annually  make  a  report  to  the  Depart- 
ment upon  their  business  operations  during  the  year,  including 
a  complete  balance-sheet  and  revenue  account.  These  must  be 
prepared  in  accordance  with  the  rules  and  regulations  of  the 
Department,  issued  under  date  of  June  2,  1902,  having  been 
prepared  after  frequent  consultation  with  the  Advisory  Council, 
consisting,  as  previously  stated,  of  managers  and  experts  thor- 
oughly familiar  with  the  subject  of  insurance  in  all  its  branches. 
The  books  of  an  insurance  company  must  be  kept  in  conformity 
to  Section  39  of  the  general  commercial  code.  The  accounts 
must  include  a  gain  and  loss  exhibit,  which,  however,  quite 
fundamentally  differs  from  the  corresponding  gain  and  loss 
exhibit  required  by  certain  states  of  the  United  States.  The 
annual  report  must  set  forth  the  course  and  development  of  the 
business  during  the  year  and  conform  to  certain  fundamental 
principles  although  the  same  may  be  amplified  according  to  the 
discretion  of  the  company.  The  code  provides  that  every 
policyholder,  upon  request,  shall  be  furnished  with  a  copy  of 

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SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

the  annual  report.  It  is  held  that  every  reasonable  requirement 
for  the  publicity  of  the  essential  facts  of  management  and  busi- 
ness experience  is  complied  with  and  that  any  additional 
information  would  be  most  likely  to  confuse  the  public  and 
furnish  data  more  or  less  misleading  for  competitive  purposes. 

Rules  Governing  Valuations. 

Special  rules,  based  upon  careful  inquiry,  and  approved  by 
the  Advisory  Council,  govern  the  calculation  and  investment 
of  the  premium  reserve.  The  reserve  is  properly  defined  as  the 
foundation  of  the  life  insurance  business.  The  code  differen- 
tiates between  the  terms  "Premium  Reserve,"  and  "Premium 
Reserve  Funds."  The  distinction  is  not  entirely  clear.  Under 
special  conditions  the  law  permits  the  use  of  the  preliminary 
term,  but  no  specific  principle  of  mortality  or  rate  of  interest 
is  laid  down.  The  Department  has  published  some  very  in- 
teresting contributions  to  the  science  of  insurance,  and  par- 
ticularly a  monograph  on  the  mortality  tables  in  general  use 
throughout  Germany,  and  another  on  the  various  systems 
of  distributing  surplus  gains  to  policyholders  under  the  par- 
ticipating contract.  Of  course,  if  the  Department  is  satisfied 
that  the  mortality  table  used  is  inadequate,  or  that  the  rate  of 
interest  assumed  is  too  low  or  too  high,  it  can  insist  upon 
necessary  changes  according  to  its  discretion. 

Actuarial  Responsibility  for  Reserve  Calculations. 

The  reserve  is  required  to  be  calculated  for  every  business 
year  and  separately  for  each  branch  of  insurance.  The  reserve 
may  be  calculated  for  individual  policies,  or  by  groups  of  iden- 
tical ages  at  entry,  or  according  to  the  duration  of  insurance 
and  the  termination  period  of  the  contract.  To  provide  for  accu- 
racy in  the  calculation  the  same  must  be  certified  to  in  the 
balance-sheet  by  at  least  one  thoroughly  competent  expert 
mathematician  or  actuary,  who  has  to  certify  that  the  premium 
reserve  as  stated  in  the  balance-sheet  has  been  calculated 
according  to  the  formula  approved  by  the  Department.     For 

250 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

the  accuracy  of  this  statement  the  actuary  or  mathematician 
is  held  personally  responsible,  and  the  code  provides  adequate 
penalties  in  the  event  of  a  dereliction  of  duty.  The  management, 
however,  remains  also  personally  responsible  for  the  accuracy 
of  the  calculations. 

Rules  Governing  Reserve  Fund  Investments. 

The  code  provides  in  a  definite  manner  for  the  investment 
of  the  reserve,  primarily  in  such  funds  as  under  the  civil  code 
are  required  for  the  investment  of  trustee  funds  for  orphans 
and  minors.  Chiefly,  of  course,  in  mortgages  and  government 
obligations.  The  latter  are  not  generally  in  much  favor  in  that 
under  the  commercial  code  their  value  has  to  be  stated  on  the 
last  day  of  the  year  according  to  the  Stock  Exchange  quotations 
on  that  day.  Since  by  mere  accident  an  exceptionally  low  price 
might  prevail  on  that  day,  the  true  value  of  the  investment 
might  be  materially  understated.  Up  to  ten  per  cent,  of  the 
reserve  may  be  invested  in  collateral  loans  upon  mortgages 
and  securities,  but  in  the  case  of  the  latter  only  to  the 
extent  of  seventy-five  per  cent,  of  the  par  value,  and  if  the 
market  price  is  below  par,  to  the  extent  of  seventy-five  per 
cent,  of  the  same.  Mortgage  loans  must  not  exceed  sixty 
per  cent,  of  the  carefully  appraised  value  of  the  property. 
Loans  can  only  be  made  upon  improved  and  productive  prop- 
erties and  not  upon  buildings  in  course  of  construction.  Invest- 
ments of  the  reserve  may  also  be  made  in  policy  loans,  which,  of 
course,  are  safest  as  well  as,  in  a  measure,  most  profitable  to  the 
company.  Loans  may  also  be  made,  but  only  to  the  extent  of  a 
small  proportion  of  the  aggregate,  in  the  obligations  of  counties, 
municipalities,  schools,  and  churches,  provided  they  are  subject 
to  a  definite  method  of  amortization.  Investments  of  funds  of 
this  character,  however,  require  the  approval  of  the  Depart- 
ment. If  no  immediate  investment  of  the  reserve  can  be  made 
in  the  required  class  of  securities,  the  money  may  remain  with 
the  Imperial  Bank,  or  a  State  Bank,  or  a  bank  specifically 
approved  by  the  Department,  or  a  public  savings  bank. 

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supervision  and  government  control  in  germany 

The  Separate  Accounting  and  Keeping  of  the  Reserve 
Funds  of  Life  Insurance  Undertakings. 

One  of  the  innovations  of  the  code  is  the  requirement  that 
the  securities  or  documents  representing  the  reserve  fund,  must 
be  kept  absolutely  separate  and  distinct  from  any  other  funds 
of  the  company,  and  they  are  generally  placed  in  a  separate 
safe  to  furnish  visible  evidence  at  any  given  time  that  the  reserve 
is  actually  kept  intact  for  the  ample  protection  of  the  interests 
of  the  policyholders.  The  separate  administration  of  the  two 
funds,  that  is,  of  the  reserve  and  the  remainder  of  the  company's 
assets,  is  also  required  to  secure  to  the  policyholders,  in  the 
event  of  bankruptcy  or  liquidation,  the  rights  of  preferred 
creditors.  The  investments  representing  the  reserve  are  re- 
quired to  be  accounted  for  in  a  separate  register.  This  must 
identify  the  individual  securities,  mortgages,  or  other  evidences 
of  property  in  such  a  manner  that  there  can  be  no  doubt  as  to 
the '  company's  undisputed  right  to  the  property.  In  the 
case  of  other  securities,  the  description  must  be  individual 
and  complete,  including  the  serial  number  of  the  same,  and 
the  only  exception  where  the  facts  may  be  stated  in  a 
lump  sum  is  in  the  case  of  policy  loans.  At  the  end  of  every 
year  the  company  must  furnish  a  certified  copy  of  the  list  of 
securities  for  the  permanent  records  of  the  Department.  It  is 
specifically  provided  that  no  funds  shall  be  taken  from  the 
reserve  for  administration  expenses,  the  payment  of  dividends, 
etc.  Of  course,  this  regulation  does  not  bear  upon  the  use  of 
the  preliminary-term  plan,  which  is  permitted  for  the  first  year 
to  the  extent  of  $12.50  per  $1,000  of  insurance. 

Time   Allowed   for  Necessary   Changes   in   Methods. 

To  carry  the  preceding  rules  and  regulations  into  effect, 
a  period  of  three  years  was  allowed  to  the  companies  to  provide 
for  a  separation  of  the  premium  reserve  funds  from  the  remain- 
der of  the  company's  assets,  while  a  period  of  five  years  was 
allowed  for  compliance  with  the  investment  provisions  of  the 
code. 

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supervision  and  government  control  in  germany 

Annual  Reports  of  Supervising  Department. 
The  Supervising  Department  is  required  annually  to  pub- 
lish a  report  of  its  administration,  supplemented  by  a  prelim- 
inary statement  of  the  more  important  facts  of  the  business 
experience  of  large  insurance  undertakings.  The  report  for 
1906,  is  dated  May  31,  1907,  and  was  pubhshed  during  the 
early  part  of  August.  It  makes  a  compact  volume  of  about 
250  pages  full  of  interesting  and  valuable  information.  In  its 
reports  and  publications  the  Department  limits  itself  to  a  state- 
ment of  essential  facts  sufficient  for  public  purposes.  It  refrains 
from  giving  publicity  to  information  which,  in  all  probability, 
would  be  used  for  improper  competitive  purposes  to  the  detri- 
ment of  the  business  and  the  pubHc.  While  the  Department 
requires  complete  information  of  all  undertakings  subject  to 
its  jurisdiction  it  gives  publicity  to  only  a  portion  of  the  facts 
collected.  In  the  opinion  of  qualified  experts,  the  distinction 
between  information  useful  to  the  public,  and  information 
strictly  for  the  confidential  and  discretionary  use  of  the  Depart- 
ment, has  been  admirably  well  drawn,  and  for  this  solution  of  a 
difficult  question  it  is  understood  the  Advisory  Council  of  the 
Department  was  chiefly  responsible. 

Extent  op  Supervision. 
On  May  31,  1907,  the  Department  had  supervision  over 
1,219  insurance  undertakings  transacting  the  business  in  its 
various  forms.  Of  tbe  just  mentioned  total,  73  were  foreign 
companies,  the  number  of  which  has  remained  about  the  same 
since  1904.  Evidently  the  effect  of  the  code  has  not  been  to 
attract  foreign  companies  to  Germany  as  a  field  for  the  further 
development  of  their  business.  Of  the  1,146  domestic  insti- 
tutions, 446  transacted  interstate  business.  Since  most  of  the 
companies  have  their  domiciles  in  Prussia,  which  forms  about 
two-thirds  of  the  area  of  the  German  Empire,  many  undertakings 
by  limiting  their  operations  to  that  State,  are,  therefore,  not 
within  the  jurisdiction  of  the  Department.  Since  a  State  is 
permitted  to  arrange  for  the  Imperial  supervision  of  local  com- 

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SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

panics,  various  States,  and  the  free  city  of  Bremen,  have  done 
so,  and  some  seven  hundred  insurance  undertakings  are  super- 
vised and  controlled  in  this  manner  the  same  as  companies 
engaged  in  interstate  business.  Of  the  446  domestic  insti- 
tutions engaged  in  interstate  business,  235  transacted  life,  21 
accident,  78  hail,  62  fire  and  50  other  forms  of  insurance.  Of 
the  seven  hundred  institutions  subject  to  the  supervising  powers 
of  the  Department  by  the  voluntary  surrender  of  State  author- 
ity, 118  were  life,  513  hail,  5  fire,  and  i  miscellaneous  insurance 
undertakings.  Of  the  73  foreign  companies,  22  were  life,  5 
accident,  40  fire  and  6  miscellaneous  undertakings. 

Premium  Income  of  Insurance  Undertakings. 

The  total  premium  of  the  companies  subject  to  the  juris- 
diction of  the  Department  was  not  quite  two  hundred  million 
dollars,  of  which  a  little  less  than  ten  per  cent,  was  the  income 
of  foreign  companies.  Of  the  total  premium  income,  fifty-five 
per  cent,  was  from  the  life  branch  of  the  business.  The  over- 
shadowing importance  of  life  insurance  is  due  primarily  to  the 
fact  that  most  of  the  fire  insurance,  in  some  form  or  other  is 
managed  by  the  State  or  by  local  companies  not  subject  to  the 
jurisdiction  of  the  Department.  The  aggregate  assets  of  under- 
takings subject  to  the  rules  and  regulations,  and  judicial  de- 
cisions of  the  Department,  exceed  two  thousand  million  dollars, 
for  the  accurate  reserve  calculations  of  which,  and  safe  invest- 
ment, the  Department  is  in  a  large  measure  responsible  under 
the  law.  In  due  recognition  of  this  fact  the  Department  takes 
its  duties  very  seriously,  and  properly  so,  and  takes  no  step 
in  any  direction  which  it  might  perhaps  be  required  to  retrace. 
Thus  far  its  judicial  decisions  have  stood  the  test,  and  it  is  sig- 
nificant that  while  the  code  was  passed  in  1 901,  no  amendments 
have  been  made  to  the  law  during  the  intervening  period  of  time. 

Invested  Assets. 

The  report  for  1906  gives  much  space  to  a  critical  consider- 
ation  of    the    aggregate    investments  of    insurance  companies, 

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SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

seventy -one  per  cent,  of  which  represent  mortgage  loans.  The 
companies  are  required  to  inform  the  Department  semi-annually 
in  detail  regarding  new  mortgage  loans,  and  during  1906, 
eighty-seven  institutions  reported  3,445  mortgage  loans,  for 
the  sum  of  357,000,000  marks  ($75,966,000).  The  report  prop- 
erly points  out  the  intimate  relation  of  such  loans  to  real  estate 
values  and  public  credit.  The  report  includes  a  table  showing 
that  most  of  the  loans  realized  four  per  cent.,  interest  but  a 
fair  proportion  paid  as  much  as  four  and  one-eighth  per  cent, 
and  four  and  one-quarter  per  cent.,  while  a  few  were  made  at  as 
low  a  rate  as  three  and  three-quarters  per  cent,  and  as  high  as 
four  and  one-half  per  cent.  The  usual  rate  of  commission  paid 
as  part  of  the  consideration  in  the  making  of  mortgage  loans 
was  one-half  per  cent.,  with  a  maximum  rate  of  three  per  cent. 

Mortgage  Loans  on  City  Real  Estate. 
Most  of  the  mortgage  loans  were  on  city  real  estate,  and 
out  of  3,409  mortgages,  1,169  or  34-4  P^^  cent.,  were  placed  in 
the  city  of  Berlin  and  suburban  sections.  Of  the  remainder, 
1,153  were  placed  in  Prussia  and  225  in  the  Hanse  towns.  This 
concentration  of  real  estate  loans  upon  a  comparatively  small  area 
would  hardly  seem  to  stand  the  test  of  impartial  critical  con- 
sideration. The  local  conditions,  however,  must  be  taken 
into  account  as  regards  loans  upon  landed  estates  or  agricul- 
tural properties,  which  are,  as  a  rule,  either  over-mortgaged 
or  very  fluctuating  in  value.  Both  the  code  and  the  rulings 
of  the  Department  decidedly  favor  mortgage  loans  in  the  busi- 
ness section  of  large  cities,  but  it  seems  that  the  area  of  such 
investments  is  not  as  large  as  would  be  desirable.  One  argu- 
ment which  has  been  advanced  in  favor  of  this  practice,  is  that 
the  appraisal  of  real  estate  is  more  accurate  or  more  in  pro- 
portion to  the  true  value  of  the  property  in  large  cities  than  in 
the  small  communities,  which  is  probably  true. 

Effective  Supervision  of  Mortgage  Loans. 
The  Department  exercises  complete  and  continuous  super- 
vision over  the  mortgage  loans  and  keeps  a  card  index,  by  cities 

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SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

and  streets,  of  all  properties  loaned  upon.  It  requires  to  be 
informed  of  the  sale  price  of  any  property  mortgaged,  as  a 
check  against  a  possible  overvaluation.  The  report  divides 
such  sales  according  to  the  method  of  appraisal — that  is,  whether 
private  or  public,  and  it  is  shown  that  during  the  last  three 
years,  1 904-1 906,  of  properties  privately  appraised,  18  per  cent, 
realized  over  100  per  cent,  of  the  appraisal;  while  of  properties 
officially  appraised,  68  per  cent,  realized  more  than  100  per 
cent.  Recalling  that  the  companies  are  permitted  to  loan  only  to 
the  extent  of  60  per  cent,  of  the  appraised  value,  it  is  shown  that 
in  the  case  of  properties  sold,  and  which  had  been  privately 
appraised,  about  23  per  cent,  brought  between  60  per  cent, 
and  80  per  cent,  of  the  appraised  value,  while  of  properties 
officially  appraised,  less  than  i  per  cent,  came  within  this 
range  of  valuation.  The  statement  is  significant  as  illustrating 
the  care  employed  to  secure  a  really  trustworthy  valuation  of 
properties  loaned  upon,  and  by  means  of  an  accurate  card 
catalogue  the  Department  is  in  full  possession  of  all  the  facts 
at  any  given  time  to  trace  a  possibly  speculative  tendency 
on  the  part  of  any  particular  insurance  undertaking  to  loan 
in  any  particular  section  of  a  city  in  excess  of  the  true 
value  of  the  property. 

Supervision  of  Reserve  Funds. 

On  December  31,  1906,  the  five-year  period  during  which 
the  companies  could  perfect  the  necessary  changes  for  the 
investment  of  their  reserve  funds  in  conformity  to  the  code, 
expired.  The  provisions  of  the  law  distinguish  between  the 
separation  of  the  reserve  funds,  their  separate  calculation 
according  to  stated  principles,  their  separate  investment,  and 
the  separate  keeping  of  the  securities.  The  rules  governing 
the  reserve  calculations,  and  the  keeping  of  the  registers  or 
accounts  of  the  valuations,  are  the  result  of  extended  delibera- 
tion and  joint  consideration  of  the  Supervising  Department 
and  the  Advisory  Council.  In  the  first  draft  of  the  code  it  had 
been  proposed  to  require  the  companies  to  send  their  reserve 

256 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

registers  in  the  original  to  the  supervising  office,  but  this  was 
later  modified,  and  only  a  copy,  properly  authenticated  and 
sworn  to,  is  required.  The  results  of  this  practice  have  been 
entirely  satisfactory.  Compared  with  the  demands  upon  Amer- 
ican life  insurance  companies  by  the  insurance  departments  of 
the  different  States,  the  requirements  of  the  German  Depart- 
ment are  very  moderate  indeed. 

Reserve  Investments  of  Companies  Transacting  Business 
IN  Foreign  Countries. 

A  difficult  question  confronts  German  companies  transact- 
ing business  abroad,  and  which,  in  compliance  with  foreign 
regulations,  can  not,  as  a  matter  of  course,  comply  with  dif- 
ferent regulations  at  home.  While  the  code  apparently  leaves 
no  alternative  but  to  insist  upon  the  same  method  of  invest- 
ment of  funds,  representing  the  reserve  in  foreign  business,  the 
Department,  within  its  power  of  discretion,  effected  a  compro- 
mise, under  which  the  companies  are  permitted  to  invest  the 
full  reserve  on  foreign  business  in  conformity  to  foreign  laws. 
A  similar  problem  confronts  the  Department  with  respect  to 
foreign  companies  transacting  business  in  Germany,  but  here 
also  a  compromise  has  been  reached  fairly  favorable  to  the 
companies.  It  is  evident,  however,  from  the  tone  of  the  report, 
as  well  as  from  the  practice  and  rulings,  that  foreign  life  insur- 
ance companies  are  not  desired  in  Germany. 

Complaints. 

During  1906  the  Department  considered  534  complaints 
of  a  varied  character,  most  of  which,  however,  related  to  the 
contractual  relations  of  the  companies  and  their  policyholders, 
being,  as  such,  subject  to  ultimate  settlement  in  the  courts. 
The  Department,  however,  used  its  best  endeavor  to  arbitrate 
differences  and  bring  about  a  better  understanding,  and  in  a 
large  number  of  cases  it  would  seem  this  method  proved  effective 
and  a  preventive  of  needless  litigation.  In  the  case  of  life 
insurance,  it  is  pointed  out  that  most  of  the  complaints  had 

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SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

to  do  with  paid-up  values  and  dividends  through  a  misunder- 
standing on  the  part  of  the  insured  of  the  contract  obHgations 
contained  in  his  poHcy.  Of  231  complaints  arising  under  life 
insurance  contracts,  61  were  disposed  of  without  correspondence 
or  a  hearing  of  the  companies  interested,  118  were  disposed  of 
by  a  single  inquiry,  while  34  involved  more  extended  considera- 
tion. The  report  points  out  that  the  Department  had  occa- 
sion to  insist  upon  modifications  of  policy  conditions,  applica- 
tions, advertising  literature,  etc.  It  also  found  it  necessary 
to  call  the  attention  of  the  companies  to  a  better  supervision 
of  the  agency  force  as  a  most  effective  means  to  prevent  mis- 
understandings with  the  insured. 

Inquiries. 

During  the  year  1906  there  were  320  inquiries,  including 
the  most  varied  questions,  many  of  which  in  their  nature  also 
involved  the  contractual  relations  of  policyholders  and  insur- 
ance companies.  Seventy  of  these  inquiries  related  to  the 
solvency  of  American  companies,  and  in  all  of  such  the  Depart- 
ment repeated  its  former  advice  that  no  evidence  had  been 
presented  to  prove  that  the  American  companies  were  not 
fully  able  to  meet  their  obligations.  Other  inquiries  related  to 
the  San  Francisco  earthquake,  liquidations,  new  concessions, 
explanation  of  policy  provisions,  etc. 

Life  Insurance  Problems. 

Extended  consideration  is  given  in  the  report  for  1906  to 
various  problems  of  life  insurance  theory  and  practice.  Among 
others,  the  question  was  considered  as  to  whether  a  life  insur- 
ance company  should  be  permitted  to  calculate  its  premium 
rates  upon  the  results  of  its  own  experience  or  be  required  to 
adhere  to  some  standard  table  in  general  use.  The  question 
came  up  in  connection  with  recent  and  very  extended  investi- 
gations of  the  Got  ha  and  the  Leipziger  (Lebensversicherungs 
Gesellschaft  auf  Gegenseitigkeit,  Alte  Leipziger)  life  insurance 
companies,   both  of    which    are    among    the   oldest   and   best 

2S8 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

managed,  insurance  undertakings  in  the  world.  The  Depart- 
ment ruled  that  the  companies  in  question  could  safely  use 
their  own  experience  as  being,  probably,  better  adapted  to  their 
specific  requirements  than  the  tables  of  mortality  in  general 
use.  The  question  of  dividend  apportionment  also  received  ex- 
tended consideration,  and  it  was  emphasized  that  the  companies 
should,  as  far  as  possible,  conform  their  preliminary  estimates  to 
the  probable  future  results  to  be  realized  in  actual  experience. 
The  dividend  systems  in  use  by  German  companies  differ  in 
many  essentials  from  those  in  use  in  the  United  States,  but 
practically  all  are  on  the  deferred  plan  to  this  extent,  that  no 
dividends  are  paid  during  the  first  five  years  of  policy  duration. 
The  dividend  payments  are,  as  a  rule,  on  the  annual  plan,  be- 
ginning with  the  sixth  year.  The  dividend  paid  in  the  sixth  year 
represents  the  gain  realized  upon  the  first  year  of  insurance  and 
so  on.  Even  the  preliminary-term  plan  in  such  cases  admits  of 
a  dividend  which  has  been  actually  earned,  being  paid  in  the 
sixth  year  of  insurance.  In  the  event  of  death  the  dividend 
gains  or  accumulations  during  the  five  preceding  years  are 
forfeited  and  revert  to  the  general  dividend  fund. 

Life  Insurance  of  Children. 

The  report  contains  a  lengthy  discussion  of  the  various 
methods  of  insuring  the  lives  of  children,  with  observations 
upon  the  systems  in  use  in  England,  the  United  States,  and 
other  countries.  The  Department  concludes,  after  careful 
investigation,  that  there  is  no  necessity  for  entirely  prohibiting 
the  insurance  of  children  as  has  been  the  case  in  France,  Bel- 
gium, and  Colorado,  but  that  a  maximum  amount  should  be 
fixed  by  law,  beyond  which  the  companies  should  not  be  per- 
mitted to  insure  a  sum  payable  in  the  event  of  the  child's 
death.  The  Department  holds  that,  as  far  as  possible,  the 
amounts  should  conform  to  the  expenses  of  the  last  medical 
attendance,  the  burial  and  other  expenses  incidental  to  the 
child's  death.  The  subject  is  being  considered  in  connection 
with  the  preparation  of  a  code  governing  the  private  or  con- 

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SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

tract  law  of  insurance,  and  it  is  quite  probable  that  a  fixed 
table  of  amounts  will  be  included  the  same  as  has  been  done 
in  England,  Australia,  and  in  New  York  and  other  States  of  this 
country.* 

Miscellaneous  Insurance  Problems. 

The  report  considers  the  question  of  insurance  without  medi- 
cal examination,  so-called  net-cost  estimates,  life  insurance  in 
connection  with  store  purchases,  or  with  savings  banks,  etc.  The 
Department  holds  it  to  be  unwise  to  combine  life  insurance 
with  any  other  commercial  elements  or  undertakings  although 
it  has  not  thought  it  necessary  to  prohibit  such  undertakings 
but  has  merely  advised  against  their  expediency.  Among 
other  subjects,  the  report  considers  pension  funds,  American 
life  insurance  investigations,  accident  and  liability  insurance, 
agricultural  insurance,  etc.  In  each  case  the  more  important 
questions  are  fully  explained  to  emphasize  the  Department's 
point  of  view  and  the  reasons  governing  decisions  or  rulings  for  or 
against  particular  practices. 

Fire  Insurance  and  the  San  Francisco  Earthquake. 

Extended  consideration  is  given  to '  the  San  Francisco 
earthquake  and  the  complex  problems  arising  out  of  a  proper 
construction  of  the  earthquake  clause.  The  report  points  out 
that  there  were  six  German  companies  transacting  business 
in  California,  mostly  under  the  New  York  standard  policy, 
which  does  not  contain  a  clause  of  non-liability  in  the  event 
of  earthquake  or  destruction  of  buildings  by  dynamite,  etc. 
In  the  aggregate  the  companies  paid  out  31,000,000  marks 
($7,378,000)  in  losses.  The  companies,  by  special  arrangement 
paid  within  about  fifteen  per  cent,  to  twenty-five  per  cent,  of 
the  actual  loss  sustained.  Three  of  the  companies,  which 
resisted  all  liability,  were  required  by  the  Department  to  sub- 
mit a  full  statement  of  the  facts,  and  after  due  consideration  of  the 

♦The  code  here  referred  to  was  enacted  in  1908  and  a  maximum 
table  of  amoimts  governing  the  insurance  of  children  was  incorporated 
therein,  conforming  in  its  essentials  to  the  New  York  law. 

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SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

contractual  relation  of  the  parties  it  was  ruled  that  the  respec- 
tive rights  could  be  determined  only  by  the  courts.  The  De- 
partment insisted,  however,  that  in  the  future  there  should  be 
more  clearness  and  a  more  pointed  explanation  of  any  clause 
limiting  the  liability  of  a  fire  insurance  company  in  cases  of 
exceptional  contingencies,  so  as  to  secure  to  the  policyholders 
the  largest  amount  of  protection.  With  the  exception  of  one 
or  two,  all  of  the  companies  later  came  to  an  agreement  with  their 
clients,  and  perhaps  in  no  single  instance  was  the  efficiency 
of  the  Department  better  illustrated  than  in  this.  Some  very 
important  questions  of  international  private  law  are  involved 
in  this  matter,  which  emphasizes  the  importance  of  insurance 
as  an  international  institution  and  the  necessity,  as  far  as 
possible,  for  uniformity  and  harmony  in  insurance  legislation 
throughout  the  world. 

Administrative  and  Judicial  Functions  of  the  Supervising 
Department  During  1906. 

During  the  year  the  Department  held  three  general  execu- 
tive meetings  and  twenty-one  open  or  public  meetings,  at  which 
133  decisions  affecting  insurance  undertakings  were  rendered. 
Of  the  twenty-one  public  meetings,  six  affected  life  insurance, 
four  accident,  four  agricultural,  five  fire,  and  two  other  insur- 
ance undertakings.  During  the  year  the  Advisory  Council 
held  one  general  meeting,  and  five  section  meetings,  for  each 
of  the  divisions  into  which  the  work  of  the  council  is  divided. 
In  eighteen  cases  members  of  the  Advisory  Board  were  indi- 
vidually consulted  for  advice.  The  Department  continued  the 
collection  of  important  court  decisions  involving  insurance 
companies  and  their  relations  to  the  policyholders,  and  by 
the  end  of  1906  a  total  of  774  such  decisions,  by  a  special 
arrangement  with  the  courts,  had  been  received  by  the 
law  division  of  the  Department.  Of  these,  270  were  published 
in  part,  with  the  necessary  explanations  for  ready  reference 
as  well  as  for  the  information  of  insurance  companies.  There 
were  nineteen  applications  for  approval  to  purchase  real  estate 

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SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

for  office  purposes,  and  of  these  seventeen  were  granted,  while 
two  were  withdrawn.  In  eighteen  cases  an  extension  of  time 
was  granted  for  the  separation  of  the  reserve  funds  from  other 
assets  as  required  by  the  code,  chiefly,  as  I  understand  it,  in 
the  case  of  small  undertakings. 

Departmental  Examination  op  Insurance  Companies. 

The  Department  made  forty-nine  local  examinations  of 
insurance  companies,  or  eighteen  more  than  during  the  pre- 
ceding year.  Of  this  number  forty  were  carried  on  in  the 
offices  of  the  companies,  four  at  general  agencies  of  inland 
undertakings,  and  five  at  general  agencies  of  foreign  companies. 
Of  the  forty-nine  examinations,  eighteen  were  of  life  insurance 
companies.  Thirty-four  of  the  examinations  were  considered 
a  general  business  revision,  while  fifteen  were  partial  or  limited 
to  the  determining  of  special  facts.  While  there  were  forty- 
nine  examinations,  these  affected  only  forty-seven  undertakings, 
of  which  fifteen  were  stock  companies  and  thirty-one  were 
mutual  companies  or  associations.  One  apparently  did  not 
come  within  either  of  these  two  classes  of  corporations.  The 
examinations  took  up  276  days,  and  including  the  subsequent 
Departmental  consideration,  consumed  a  large  amount  of  the 
time  of  the  Department  during  the  year.  As  far  as  it  is  possible 
to  judge,  the  examinations  proceed  upon  somewhat  different 
principles  than  those  in  vogue  in  this  country,  and  do  not 
enter  into  matters  of  detail  to  the  extent  as  is  the  case  over 
here.  This,  of  course,  in  part  is  due  to  the  fact  that  the  De- 
partment is  already  in  possession  of  a  mass  of  information  and 
data  regarding  the  methods  and  experience  of  the  companies 
subject  to  its  jurisdiction.  The  entire  expense  of  examinations 
is  paid  by  the  Department. 

Procedure  in  the  Consideration  of  Pending  Cases. 

The  consideration  of  questions  and  problems  arising  under 
different  provisions  of  the  code  is  arranged  in  ten  groups. 
Limiting  the  present  discussion  to  only  such  undertakings  as 

262 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

were  subject  to  the  jurisdiction  of  the  Department  on  account  of 
being  engaged  in  interstate  business,  there  were  in  the  aggregate 
575  cases  considered,  of  which  429  were  disposed  of,  leaving 
146  remaining  at  the  close  of  the  year.  Of  these,  fifty-six  had 
been  disposed  of  by  the  end  of  May,  1907.  Some  of  these  cases 
had  been  under  consideration  for  several  years,  and  the  pro- 
cedure in  many  is  necessarily  slow.  Of  the  429  cases  disposed 
of,  thirty-two  had  to  do  with  applications  for  authority  to  do 
business;  123  with  the  Department's  approval  of  changes  in 
articles  of  association,  by-laws,  etc.,  pertaining  to  the  organ- 
ization of  insurance  undertakings;  eighty-eight  with  changes 
in  policy  conditions;  forty-one  with  changes  in  premium  rates; 
thirty-one  with  the  introduction  of  new  methods  or  branches  of 
insurance  by  existing  undertakings;  twenty-seven  with  the 
territorial  extension  of  business  operations  to  other  States; 
thirty-three  with  the  extension  of  operations  under  other  pro- 
visions of  the  code ;  seven  with  amalgamation ;  three  with  liqui- 
dations of  mutual  insurance  undertakings  and  forty-four  with 
the  provision  of  the  code  defining  small  insurance  enterprises. 

The  Duty  op  Publicity  ' 

The  action  of  the  Department  in  all  important  cases  arising 
under  the  various  provisions  of  the  code  is  fully  explained  in 
an  extended  review  forming  part  of  the  annual  report.  By 
this  means  an  extremely  valuable,  continuous  record  of  the 
work  of  the  Department  is  preserved  and  made  readily  acces- 
sible to  the  companies  and  the  public.  The  Department  appears 
to  recognize  the  fact  that  the  duty  of  publicity  is  a  mutual  one, 
as  much  being  required  of  the  companies  on  the  one  hand  as 
of  the  Department  on  the  other,  while  at  the  same  time  there 
is  an  absence  of  needless  publicity  of  facts  or  information 
likely  to  be  used  for  improper  competitive  purposes. 

The  Question  of  Taxation. 

The  subject  of  taxation  is  so  large  and  involved  that  it 
precludes  adequate  presentation  in  a  discussion  of  this  kind. 

263 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

The  taxation  of  insurance  companies  in  Germany  is  left  as 
formerly  to  the  States  or  local  administrative  powers.  Except 
for  the  difficulties  arising  out  of  a  needlessly  complex  system 
of  stamp  taxes  of  which  as  many  as  three  may  be  imposed 
upon  one  transaction,  the  tax  problem  is  not  a  very  serious 
one.  As  has  been  said,  the  cost  of  Imperial  supervision  is 
less  than  thirty  cents  per  $i,ooo  of  gross  premium  income. 
The  total  taxes  paid  by  large  insurance  undertakings  during 
1905  amounted  to  2,260,000  marks  ($537,880)  out  of  a  gross 
premium  income  of  787,000,000  marks  ($187,306,000).  In 
other  words,  the  rate  of  taxation  was  $2.87  per  $1,000  of 
premium  income.  Considering  life  insurance  companies  sepa- 
rately, the  rate  was  $2.33;  accident  and  liability  companies, 
$3.69;  and  of  fire  insurance  companies  $3.77.  It  may  be  said 
in  this  connection  that  during  1906  American  life  insurance 
companies  alone  paid  nearly  $11,000,000  in  taxes,  fees,  etc., 
equivalent  to  2.1  per  cent,  of  the  premium  income.  Had  the  rate 
of  life  insurance  taxation  in  this  country  been  the  same  in  1906 
as  in  Germany,  over  $8,000,000  would  have  been  saved  to  policy- 
holders of  American  life  insurance  undertakings.* 

Conclusions. 

Government  regulation  of  insurance  in  Germany  is  simple 
and  effective.  The  complete  supervision  of  the  companies  is 
obtained  at  a  minimum  of  interference  and  expense.  The 
code  is  in  marked  contrast  to  our  own  conflicting,  costly  and 
constantly  changing  system.  In  time,  no  doubt,  we  shall  realize 
the  futility  of  State  legislation  and  State  interference  carried  to 
the  extreme.  Some  day  we  shall  return  to  our  earlier  political 
ideal  that  "the  government  which  governs  least  is  the  govern- 
ment which  governs  best.  Efforts  making  for  uniformity  in 
insurance  legislation  will  be  to  small  purpose  until  existing 
statutory  requirements  are  radically  revised  and  reduced  to  a 

*  For  an  interesting  comparison  of  the  American  and  German  system 
of  life  insurance  taxation,  see  the  address  by  Mr.  John  F.  Dryden,  re- 
published in  Addresses  and  Papers,  Newark,  N.  J.,  1910,  pp.  165-6. 

264 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

more  simple,  but  at  the  same  time  more  effective  system.  The 
essence  of  all  law,  it  has  very  properly  been  said,  is  necessity, 
and  only  when  law  making  is  limited  to  absolutely  essential 
needs  is  there  a  reasonable  certainty  that  the  legislation  will 
prove  effective  and  permanent. 

The  German  code  has  not  been  amended  or  changed  since 
it  went  into  effect  some  six  years  ago;  the  Austrian  regulations 
have  not  undergone  a  change  during  the  past  eleven  years  and 
they  are  practically  identical  with  the  regulations  which  have 
been  in  force  since  1880;  the  Swiss  laws  have  remained  prac- 
tically the  same  since  first  adopted  in  1885,  or  over  twenty  years 
ago.  In  brief,  these  codes  conform  to  the  dictum  of  Mr.  James 
Bryce  that  "The  chief  merit  of  a  rule  of  law  is  that  it  should 
seize  a  feature  which  a  large  set  of  instances  really  have  in 
common  and  should  effectually  provide  for  them  and  for  them 
only/'"^  and  of  no  legislation  is  this  more  important  than  of  the 
statutory  requirements  of  the  business  of  insurance. f 

During  the  last  ten  years  American  legal  reserve  life 
insurance  companies  have  made  a  direct  return  to  the  different 
States  of  some  eighty  million  dollars  in  taxes,  licenses,  fees,  etc. 
For  every  dollar  paid  in  taxes,  etc.,  by  American  policyholders, 
the  German  policyholders  have  paid  fourteen  cents.  The  con- 
stant changes  in  statutory  regulations,  and  the  ever-increasing 
burdens  of  taxation  are  a  serious  menace  to  the  business,  but  fully 
as  much  are  the  frequent  changes  in  supervising  officials.  There 
is  an  imperative  necessity  for  permanency  in  insurance  law 
and  permanency  in  the  tenure  of  office  of  the  insurance  com- 
missioner or  superintendent  charged  with  the  execution  of  the 
law.  In  these  and  other  matters  it  would  seem  that  we  may 
learn  much  from  a  critical  and  impartial  study  of  foreign  insur- 

*  Studies  in  History  and  Jurisprudence,  by  James  Bryce,  D.  C.  L. 
Oxford  University  Press,  1904. 

t  For  an  interesting  account  of  insurance  supervision  in  Europe,  as 
viewed  by  an  American  Insurance  Department  official,  see  the  Report 
by  Chas.  Hughes,  Chief  Examiner  of  the  New  York  Insurance  Dep't, 
Albany,  1910. 

265 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

ance  legislation,  but  perhaps  most  of  all  from  the  scientific 
codes  of  law  on  insurance,  enacted  by  the  German  Empire  in 
1 901  and  1908. 

REFERENCES. 

1858     Staudinger,   Rechtslehre     ueber  den  Versicherungsvertrag.      (Er- 

langen.) 
1865     Doehl,  Das  Versicherungswesen  des  preussischen  Staates.    (Berlin.) 
1871     Schmidt,  Louis,  Das  Versicherungswesen,  Chap.  IX. 
1880     Die  Elster,  Lebensversicherung  in  Deutschland.     (Jena.) 
1885     Ruediger,     Die     Rechtslehre     vom     Lebensversicherungsvertrag. 

(Berlin.) 
Zavicza,    1st    Staatsaufsicht    ueber    das    Versicherungswesen    in 

Deutschland  einzufuehren  ?     (Berlin.) 
1900     Dohrn,   Unwirksamkeit  und  mangelhafte  Wirksamkeit  des  Ver- 

sicherungsvertrages.     (Goettingen.) 
Hager,    Die    oeffentlich-rechtlich    Regelung    des   Privatversicher- 

ungswesens  in  Deutschland.     (Berlin.) 

1900  Bericht    der    VII.    Kommission    betreffend    des    Entwurfs    eines 
-01         Gesetzes    ueber    die    privaten    Versicherungsuntemehmungen. 

(Berlin.) 

1 90 1  Manes,  Das  Reichsgesetz  ueber  die  privaten  Versicherungsunter- 

nehmungen.     (Leipzig.) 

Koenige,  Gesetz  ueber  die  privaten  Versicheruiigsuntemehmungen. 
(Berlin.) 

Neumann,  Gesetz  ueber  die  privaten  Versicherungsuntemehm- 
ungen,     (Berlin.) 

1902  Zehnter,  Erlaeuterungen  zum  Reichsgesetz.     (Berlin.) 
Deyheck,    Reichsgesetz    ueber    die    privaten    Versicherungsunter- 

nehmungen.     (Leipzig.) 
Naundorff,   Reichsgesetz  ueber  die  privaten  Versicherungsunter- 
nehmungen.     (Leipzig.) 

1903  Moldenhauer,    Die    Aufsicht   ueber   die    privaten    Versicherungs- 

untemehmungen. (Leipzig.) 
Kritik  des  Gesetzentwurfs  ueber  den  Versicherungsvertrag  Be- 
richte  imd  Debatten  auf  der  Mitglieder-Versammlung  des 
Deutschen  Vereins  fuer  Versicherungs-Wissenschaft.  Berlin, 
1904. 
1906  Begruendung  zu  den  Entwuerfen  eines  Gesetzes  ueber  den  Ver- 
sicherimgsvertrag  eines  zugehoerigen  Einfuehrungsgesetzes 
und  eines  Gesetzes,  betreffend  Anderung  der  Vorschriften  des 
Handelsgesetzbuchs  ueber  die  Seeversicherung.     Berlin,  1906. 

266 


SUPERVISION  AND  GOVERNMENT  CONTROL  IN  GERMANY 

1908  Moldenhauer,  Die  Entwickelung  der  deutschen  Volkswirtschafts- 

ehre.     (Leipzig.) 

Gesetz  ueber  den  Versicherungsvertrag  nebts  dem  Einfuehnmgs- 
gesetze  und  dem  Gesetze  betreffend  Aenderung  der  Vorschriften 
des  Handelsgesetzbuches  ueber  die  Seeversicherung.  Berlin, 
1908.     von  Dr.  jur.  C.  Neumann. 

Kommentar  zum  Deutschen  Reichsgesetz  ueber  den  Versicher- 
ungs-Vertrag,  von  Stephan  Gerhard,  Otto  Hagen,  Hugo  v.  Knebel 
Doeberitz,  Hermann  Broecker  and  Alfred  Manes.     Berlin,  1908. 

1909  Gruner,   Beaufsichtigung  der  Vers.   Anstalten  vom  techn.  Stand- 

punkte.     Vereinheitlichung  der  Vorschriften.      (Berlin.) 
Die  Entwickelung  des  privaten  Versicherungswesens  unter  Reichs- 

aufsicht  in  dem  Jahrfuenft  1902  bis  1906.     (Berlin.) 
Geschaeftsbericht   des    Kaiserlichen    Aufsichtsamts   fuer    Privat- 

versicherung.     (Berlin.)     Annual  Reports,  1 902-1 909. 

1910  Veroeffentlichungen  des  Kaiserlichen  Aufsichtsamts  fuer  Privat- 

versicherungen  1902-1910.     (Berlin.) 


267 


CHAPTER  VI 
THE  TAXATION  OF  LIFE  INSURANCE  INTERESTS. 

The  theory  and  practice  of  insurance  taxation  is  rarely 
referred  to  in  the  text-books  on  taxation  and  the  reports  of  tax 
commissioners,  yet  the  taxation  of  insurance  interests  increases 
from  year  to  year  until  a  point  has  been  reached  where  addit- 
ional burdens  are  likely  to  imperil  the  future  of  the  business. 
To  a  large  extent  this  indifference  to  a  scientific  study  of  the 
problem  of  life  insurance  taxation  is  due  to  the  fact  that  life 
insurance  is  a  most  complex  business,  and  taxes  have  as  a  rule 
been  imposed  in  ignorance  of  the  real  nature  of  the  insurance 
contract.  The  discussions  before  tax  commissions,  in  State 
Legislatures  and  Congress  are  proof  that  to  the  average  legis- 
lator there  is  but  one  viewpoint  of  the  matter,  and  that  is 
the  vast  accumulation  of  assets  held  by  companies  for  the 
future  discharge  of  their  liabilities.  What  is  seen  is  the  mil- 
lions of  dollars  of  funds;  what  is  not  seen  is  the  corresponding 
liability  charged  against  these  funds ;  and  because  of  the  indif- 
erence  to  the  latter,  taxes  are  recklessly  imposed  and  funds  are 
diverted  from  their  proper  purpose  until  a  point  has  been 
reached  where  the  returns  to  policy-holders  have  diminished, 
where  the  cost  of  insurance  has  been  increased,  where  the 
economical  extension  of  the  business  has  been  made  more 
difficult  and  where  the  future  of  the  business  is  threatened 
unless  a  complete  change  in  public  opinion  is  brought  about  as 
to  the  proper  scope  and  limits  of  the  taxation  of  life  insurance 
interests. 

The  taxation  of  life  insurance  involves  the  present  and 
future  welfare  of  a  large  and  increasing  proportion  of  our 
poptdation,  representing  the  most  intelligent,  industrious  and 


THE   TAXATION   OF   LIFE   INSURANCE   INTERESTS 

thrifty  of  our  nation.  Briefly  stated,  there  are  to-day  (1909) 
in  this  country,  28,000,000  policies  in  force  in  ordinary  and 
industrial  level  premium  companies,  which  require  annually  in 
the  aggregate  the  payment  of  more  than  $565,200,000  in  pre- 
miums. Of  this  vast  sum,  representing  an  almost  inconceivable 
amount  of  prudence  and  self-denial,  over  $12,000,000  is  paid 
to  the  national  government,  the  state  or  the  municipality,  in 
taxes  or  license  fees  of  one  form  or  another.  In  other  words, 
out  of  every  $100  collected  in  life  insurance  premiums,  $2.15  is 
paid  in  taxes ;  or,  if  we  consider  the  pa5anents  made  to  policy- 
holders, which  now  exceed  $360,730,000  per  annum,  $3.36  is 
paid  in  taxes  for  every  $100  paid  to  the  beneficiaries  of  life 
insurance  policy-holders ! 

If  it  is  true  of  the  general  theory  and  practice  of  taxation 
in  this  and  other  countries  that  "It  will  be  difficult  to  find 
in  the  whole  realm  of  political  economy  a  subject  more  gener- 
ally misconceived,  more  disfigured  by  false  views,  more  de- 
graded by  a  partial  study" ;  this  is  especially  true  of  that  branch 
of  the  subject  which  relates  to  the  taxation  of  life  insurance 
interests.  It  is  not  going  too  far  when  it  is  maintained  by 
those  who  have  given  much  thought  to  the  subject,  that  life 
insurance  in  this  country  is  to-day  one  of  the  most  heavily 
taxed  institutions  making  directly  for  the  welfare  of  the  people 
and  for  the  diminution  of  public  burdens  which  would 
have  to  be  provided  for  by  taxes  upon  other  interests. 
While  erroneous  views  on  this  subject  are  due  in  a  large 
measure  to  the  intricate  nature  of  the  life  insurance  business, 
they  are  more  largely  due  to  the  fact  that  the  vast  accumu- 
lations of  life  insurance  companies  represent  an  exceptional 
opportunity  for  the  raising  of  public  revenue  with  a  certainty 
of  its  collection. 

A  Tax  Upon  Thrift. 

The  utmost  publicity  is  given  by  law  to  all  the  essential 
facts  pertaining  to  the  business;  the  amounts  of  premiums 
collected,  the  amounts  of  dividends  paid,  the  amounts  of  assets 
and  of  surplus  accumulated,  are  given  in  full  in  the  annual 

269 


THE   TAXATION    OF   LIFE   INSURANCE   INTERESTS 

statements  of  the  companies  to  the  different  insurance  depart- 
ments. Nothing  unfortunately  is  of  more  common  occurrence 
than  on  occasion  of  local  need  for  additional  revenue  to  de- 
mand an  additional  tax  upon  life  insurance  interests,  and  yet 
it  requires  but  a  brief  consideration  of  the  real  interests  in- 
volved and  of  the  real  nature  of  the  business,  to  make  it  clear 
to  those  free  from  bias  or  prejudice  that  taxes  upon  life  insur- 
ance are  a  tax  upon  prudence,  a  tax  upon  thrift,  a  tax  upon  a 
business  which  should  be  free  from  all  burdensome  restrictions 
to  enable  it  to  develop  and  to.  expand  to  the  highest  degree 
of  possible  usefulness. 

It  is  one  of  the  most  common  errors  in  the  theory  of  life 
insurance  taxation  to  assume  that  life  insurance  itself  repre- 
sents capital.  Now,  capital  is  realized  wealth,  while  life  insur- 
ance is  merely  a  promise  to  pay  a  certain  sum  in  the  event  of 
the  occurrence  of  a  contingency  provided  for  in  the  policy. 
Life  insurance  is  a  present  means  of  obtaining  a  certain  advan- 
tage over  an  uncertain  future  event,  and  it  is  on  this  ground, 
though  not  on  this  ground  alone,  that  life  insurance  or  the 
premiums  paid  for  insurance  protection  should  not  be  considered 
a  proper  subject  of  burdensome  taxation.  If  we  inquire  into 
the  objects  and  nature  of  life  insurance  and  the  relation  of  life 
insurance  to  the  state,  we  find  that  the  primary  object  of  this 
form  of  thrift  is  to  provide  for  dependents,  for  widows  and 
orphans,  who,  but  for  such  provision,  in  many  instances, 
would  become  charges  or  wards  of  the  state.  By  just  so 
much  as  this  is  avoided,  by  just  so  much  as  women  and 
children  are  made  independent  of  such  assistance,  the  revenue 
of  the  nation  or  of  the  state,  is  relieved,  and  can,  therefore,  be 
devoted,  and  is  devoted,  to  the  development  of  other  interests 
affecting  the  public  welfare.  Considered  from  this  point  of  view, 
it  is  clear  that  life  insurance  should  not  be  an  object  of  tax- 
ation, but  rather  to  the  contrary,  as  a  means  of  diminishing 
public  burdens,  it  should  in  all  respects  receive  the  generous 
consideration  of  the  state. 

270 


the  taxation  of  life  insurance  interests 

Insurance  Taxation  Contrary  to  Public  Policy. 

The  political  or  economic  justification  for  a  tax  on  life 
insurance  is  in  harmony  with  the  theory  advanced  by  McCul- 
loch  that  "it  is  easily  assessed  and  collected,"  but  it  is  contrary 
to  his  conception  of  an  equitable  tax,  in  that  it  is  not  "at  the 
same  time  conducive  to  public  interests."  More  than  a  century 
ago  the  subject  matter  of  life  insurance  taxation  was  carefully 
considered  by  Mr.  Pitt  in  the  framing  of  the  English  income  tax 
bill  in  1798,  and  it  may  not  be  out  of  place  here  to  repeat 
the  language  then  used,  and  which  is  as  applicable  to  the  point 
at  issue  as  if  it  had  been  advanced  to-day.  Under  the  English 
income  tax  law  of  1798  incomes  were  exempted  from  the  payment 
of  the  tax  to  the  extent  of  the  premiums  paid  on  life 
insurance.  In  defending  this  clause,  Mr.  Pitt  said:  "There 
is  one  case  which,  with  a  view  to  that  class  who  are  really 
willing  to  save  for  the  benefit  of  others  for  whom  they  are 
bound  to  provide,  makes  some  modification.  It  is  in  favor 
of  those  who  have  recourse  to  that  easy,  certain  and  advanta- 
geous mode  of  providing  for  their  families  by  assuring  their 
lives.  In  this  bill,  as  in  the  assessed  taxes,  a  deduction  is 
allowed  for  what  is  paid  on  this  account."  This  early  recog- 
nition of  the  intimate  relation  between  life  insurance  and  public 
welfare  is  of  more  than  passing  significance.  Life  insurance 
in  England  was  then  in  its  very  infancy,  but  even  at  that  stage 
the  good  results  likely  to  follow  its  universal  extension  had 
become  manifest.  It  was  brought  out  later,  in  the  evidence 
submitted  to  a  special  committee  on  assurance  associations  in 
1853,  that  largely  in  consequence  of  this  exemption  from  tax- 
ation, life  insurance  in  England  had  made  material  advances, 
a  portion  of  which  at  least  was  directly  attributed  to  the  relief 
from  taxation.  Of  one  office,  the  Equitable  (London),  it  was 
stated  in  the  evidence  that,  while  during  the  ten  years  pre- 
ceding the  passage  of  this  act  the  increase  in  business  had 
been  but  $4,500,000,  the  increase  during  the  decade  following  the 
passage  of  the  income  tax  law,  relieving  assurance  associations 
from  the  payment  of  that  tax,   had  been  $20,000,000.     The 

271 


THE   TAXATION   OF   LIFE    INSURANCE   INTERESTS 

principle  laid  down  in  1798  has  practically  remained  the  law 
of  England  to  the  present  time. 

The  principle  of  non-taxation  of  life  insurance  in  England, 
as  laid  down  by  Mr.  Pitt  in  1798,  has  been  frequently  re-affirmed 
in  the  works  of  recognized  authorities  on  economics  and  finance. 
A  tax  on  insurance,  according  to  Mill,  as  stated  in  his  "  Principles 
of  Political  Economy,"  "is  a  direct  discouragement  of  pru- 
dence and  forethought,"  and  this  view  is  practically  accepted 
by  McCulloch,  who  even  more  forcibly  expressed  himself  to 
the  point  that  a  tax  on  insurance  "discourages  that  providence 
and  foresight,  the  encouragement  of  which  ought  to  be  an 
object  with  all  prudent  governments,"  and  "seeing  the  vast 
importance  of  insurance,  it  may  well  be  doubted  whether  it 
ought  to  be  charged  with  any  duty,  however  slight."  With 
particular  reference  to  taxation  of  insurance  interests  in  this 
country,  the  subject  was  discussed  in  an  able  treatise  thirty- 
four  years  ago  by  S.  Morton  Peto,  according  to  whom  "A  tax 
on  insurance  is  a  tax  not  only  upon  industry,  but  upon  prudence 
and  frugality,  and  the  American  system  seems  to  be  far  worse 
than  that  of  which  we  have  been  so  long  complaining  in  Great 
Britain,"  and  yet  the  conditions  confronting  insurance  com- 
panies to-day  are  vastly  more  serious  than  they  were  under 
the  war  conditions  of  the  early  sixties. 

The  Practice  of  Life  Insurance  Taxation. 

The  method  of  life  insurance  taxation  is  a  matter  so  in- 
volved and  complicated  by  local  conditions,  varying  with  the 
different  states,  and  even  with  the  municipalities,  in  which 
the  companies  operate,  that  a  critical  discussion  forms  a  subject 
by  itself.  It  is  the  general  practice  of  states  to  impose, 
first,  the  general  property  tax  upon  the  real  estate  and  personal 
property  of  the  companies  within  reach  of  the  tax  assessor. 
This  tax  in  1909  formed  about  thirty  per  cent,  of  the  total 
amouni  paid  in  taxes  by  a  large  and  representative  life 
insurance  company.  To  this  tax,  provided  it  is  properly 
assessed,    there    has    never    been    any    serious    objection    on 

272 


THE   TAXATION    OF   LIFE   INSURANCE   INTERESTS 

the  part  of  life  insurance  companies,  the  burden  being  con- 
sidered a  proper  one  as  a  just  contribution  toward  the 
general  cost  of  state  government.*  By  far  the  most  important 
tax  item,  however,  is  the  tax  on  premium  income,  which  may- 
vary  from  one  to  three  per  cent.,  according  to  the  state  in 
which  a  company  transacts  business.  The  tax  on  premiums 
is  an  unjust  burden  upon  the  business  for  the  tax  falls 
alike  upon  new  premiums  for  risks  just  incurred  and  upon 
renewal  premiums  on  risks  assumed  years  ago.  It  can  readily 
be  seen  that  risks  assumed  years  ago  were  calculated  to 
produce  a  certain  result  on  an  assessment  rate  of  mortality 
and  interest.  The  imposition  of  taxes  upon  such  payments 
must  needs  decrease  the  return  to  policyholders,  and  increase 
in  consequence,  the  cost  of  insurance.  If  carried  to  the  extreme, 
especially  in  the  case  of  companies  which  issue  only  non- 
participating  policies,  such  companies  may  ultimately  be 
unable  to  meet  in  full  their  obligations  in  consequence  of  a 
policy  on  the  part  of  the  states  which  is  as  unwise  as  it  is 
unnecessary. 

Taxes  on  Premiums. 

The  practice  of  taxing  premiiim  receipts  was  ably  discussed 
some  years  ago  in  an  article  in  the  New  York  Evening  Post, 
and  in  part  as  follows: 

"It  is  a  fundamental  principle  of  social  science  that  the 
insurance  contract  itself  ought  to  be  free  from  taxation.  Tax- 
ation ought  to  be  on  property,  on  production.  Insurance  con- 
tracts produce  nothing.!  If  any  tax  is  imposed  on  insurance 
companies  or  insured  persons  as  such,  it  should  be  imposed  on 
their  property  and  not  on  their  contract.     The  taxation  of 

*  Probably  the  most  important  contribution  to  the  technical  con- 
sideration of  the  question  of  local  taxation  of  life  insurance  companies 
is  the  brief  filed  by  Richard  V.  Lindabury  and  Edward  D.  Duffield, 
Cotinsel  for  Plaintiff  in  Error,  the  Prudential  Insurance  Compajiy  of 
America,  in  the  case  of  the  Mayor  and  Common  Coimcil  of  Newark, 
et  al.,  vs.  The  State  Board  of  Equalization  of  Taxes  and  The  Prudential 
Insurance  Company  of  America,  1910. 

t  This  question  is  discussed  in  Chapter  II. 

273 


THE    TAXATION    OF   LIFE    INSURANCE    INTERESTS 

premium  receipts  is  utterly  unscientific.  It  has  no  basis  of 
credit  in  the  ultimate  distribution  of  the  tax.  The  practical 
effect  of  it  is  seen  by  a  calculation  of  what  a  policy  of  life  insur- 
ance, running  thirty  or  forty  years,  will  amount  to  at  the  end 
of  the  term  if  the  premiums  actually  paid  are  accumulated 
at  compound  interest,  and  what  it  will  amount  to  in  case  the 
premiums  before  accumulation  are  diminished  by,  say  a  three 
per  cent.  tax.  Anyone  making  such  a  calculation  would  be 
startled  by  the  result.  A  tax  of  three  per  cent,  on  a  premium, 
when  it  comes  to  a  final  settlement  in  the  payment  of  policies, 
amounts  to  an  enormous  burden  on  the  widows  and  orphans  of 
deceased  policy-holders,  far  beyond  the  tax  levied  on  any  other 
species  of  property  in  the  community." 

Taxes  on  Surplus. 

So  much  as  regards  the  taxation  of  the  premium  income. 
The  third  item  of  importance  is  the  tax  on  surplus,  which  forms 
about  thirteen  per  cent,  of  the  total  taxes  paid  at  the  present 
time  in  the  case  of  a  large  and  representative  company. 
This  tax  is  subject  to  the  same  criticism  as  the  tax  on 
premiums,  in  that  it  is  both  unscientific  and  unjust,  being  in 
fact  in  the  direction  of  an  impairment  of  the  contract  obli- 
gations of  the  companies  which  have  agreed  to  pay  a  sum 
certain  under  conditions  which  did  not  presuppose  the  subse- 
quent imposition  of  heavy  taxes.  A  company,  by  the  inherent 
nature  of  the  science  of  life  contingencies,  depends  for  the  ful- 
fillment of  its  obligations,  first,  upon  a  normal  mortality;  second, 
upon  the  realization  of  an  expected  rate  of  interest  on  its  invest- 
ment. The  gradual  decline  in  interest  rates  has  made  it  neces- 
sary for  most  of  the  American  companies  to  henceforth  calculate 
their  premiums  on  a  three  per  cent,  basis,  and  there  has  been  in 
consequence  an  increase  in  premium  rates  during  recent  years. 
I  doubt  if  this  change  in  rates  would  have  been  necessary  if  the 
matter  of  state  taxation  had  remained  the  comparatively  unim- 
portant item  it  was,  even  as  recently  as  ten  years  ago.  This 
point  was  recognized  as  early  as  1855,  when  in  an  article  entitled, 
"Should  Life  Insurance  Companies  be  Taxed,"  the  Insurance 
Monitor  of  New  York  (p.  18)  said: 

274 


THE   TAXATION   OP   LIFE   INSURANCE    INTERESTS 

"The  principle  of  insurance  on  lives  supposes  the  average 
duration  of  life  to  be  an  ascertained  fact,  and  that  a  given 
premium  annually  invested  and  compounded  at  a  given  rate  of 
interest  will  produce  the  amount  called  for  by  the  policy. 

"Whatever,  therefore,  disturbs  the  rate  of  accumulation 
must  affect  the  result,  and  a  company  whose  engagements 
require  $100,000  to  be  annually  invested  at  six  per  cent  will 
at  the  end  of  the  thirty-one  years  (the  average  duration  of 
policies)  show  a  deficiency  of  $1,000,000,  in  case  its  accumu- 
lations be  taxed  one  per  cent.  Taxation  is  therefore  fatal  to 
the  business  of  life  insurance  in  this  state." 

Stamp  Taxes. 

The  fourth  item  in  direct  taxation  is  now  happily  a  matter 
of  history  only,  that  is,  the  internal  revenue  tax  on  new  in- 
surance contracts,  imposed  under  the  war  reveniie  act  of  1898.* 
Under  this  law  ordinary  insurance  contracts  were  charged  a 
stamp  tax  of  eighty  cents  per  $1,000  of  insurance,  while  indus- 
trial contracts  were  charged  forty  per  cent,  of  the  first  weekly 
premium.  This  tax  formed  twenty-one  per  cent,  of  the  total 
taxes  paid  by  one  large  and  representative  company  dur- 
ing the  year  1899,  and  amounted  to  almost  $100,000.  A 
more  unscientific  and  inequitable  as  well  as  unnecessary  tax 
was  never  levied  than  this  additional  burden  upon  an  interest 
already  taxed  beyond  the  point  of  sufferance.  It  was  imposed 
upon  the  companies  under  the  stress  of  war  conditions,  but 
even  under  conditions  of  peace  the  Senate  submitted  to  its 
repeal  only  in  conference  committee.  Those  who  are  inter- 
ested in  the  subject  and  who  may  wish  to  trace  the  error  which 
underlies  nearly  all  the  insurance  taxation  in  this  country, 
namely,  complete  ignorance  of  the  nature  of  the  business  and 
the  effect  of  taxes  upon  vested  rights  and  obligations,  should 
read  the  debates  of  Congress  on  the  reduction  of  the  war 
revenue  tax,  February  6,  1901.  (Congressional  Record,  Vol. 
34,  No.  47,  p.  2194,  et  seq.) 

*  For  a  discussion  of  the  first  stamp  taxes  upon  insurance  imposed 
by  the  U.  S.  Congress,  see  chapter  IV,  p.  190. 

275 


THE   TAXATION    OF   LIFE    INSURANCE   INTERESTS 

Considering  now  the  expenses  for  state  supervision,  licenses 
and  fees,  opinions  differ  as  to  whether  these  items  should  prop- 
erly be  considered  taxes  in  the  true  sense  of  the  word.  The 
direct  burden  of  this  tax  is  less  than  the  indirect  burden,  since 
in  consequence  of  the  multiform  system  of  state  supervision  the 
general  expense  rate  of  the  companies  has  been  materially  in- 
creased on  account  of  the  larger  clerical  expense  for  the  compila- 
tion of  data  not  required  for  office  purposes  and  of  small  value  or 
interest  to  the  general  public.  Few  state  commissioners  remain 
long  enough  in  office  to  gain  sufficient  personal  experience  to 
prove  of  real  value  to  the  insuring  public,  and  they  seldom  possess 
actuarial  or  other  insurance  qualifications  to  make  their  recom- 
mendations useful.  Hence  the  cost  of  state  supervision  and 
the  implied  office  expense  is  in  itself  an  item  of  considerable 
magnitude  imposed  upon  the  companies  in  addition  to  the  taxes 
already  referred  to. 

The  complications  and  diversities  of  state  taxation  may  be 
further  illustrated  as  follows:  In  the  state  of  New  Jersey  life 
insurance  companies  pay  first  a  tax  of  0.35  per  cent,  on  their 
total  premium  income,  and  in  addition  a  tax  of  one  per  cent, 
on  surplus.  Now,  in  states  which  tax  premiums  collected 
within  the  state,  an  additional  tax  of  from  one  to  three  per 
cent,  may  be  collected,  as,  for  instance,  in  the  case  of  Kentucky, 
where  the  local  state  tax  is  two  per  cent,  on  gross  premiums 
collected  within  the  state.  Thus  the  same  premium  income, 
already  taxed  once  in  New  Jersey,  is  made  subject  to  a 
second  tax  in  the  state  of  Kentucky,  but  in  addition  there 
is  in  force  in  that  particular  state  a  law  under  which  the  city 
of  Louisville  collects  a  further  tax  from  life  insurance  com- 
panies equal  to  two  and  one-half  per  cent,  of  the  premiums 
on  new  business  collected  in  the  city,  imposing  thus  a  third 
tax  upon  the  same  item  of  premium  income.  In  Newport 
the  same  tax  or  two  and  one-half  per  cent,  is  collected,  and 
in  Covington  one  and  one-half  per  cent.  But  this  is  not 
all,  there  have  been  paid  in  addition  fees  for  state  super- 
vision, valuation,  filing  of  certificates,  etc.,   and  license   fees 

276 


THE   TAXATION   OP   LIFE   INSURANCE   INTERESTS 

for  agents,  all  of  which,  of  course,  must  come  out  of  the 
premium  income  derived  from  local  business,  and  all  of 
which  lie  against  the  business  transacted  in  the  state  of 
Kentucky  as  an  expense.  Even  this  is  not  all.  After  the 
various  charges  have  been  met  and  have  been  deducted  from 
the  premiums  received  there  would  be  an  additional  tax  on 
the  remainder,  if  invested  in  local  real  estate,  and  under  the 
war  revenue  act,  there  would  have  been  an  internal  revenue 
tax  of  eighty  cents  per  $i,ooo  of  new  insurance.  Thus  we 
have  it  that  in  this  state,  on  a  premium  of  say,  $32.68, 
at  age  forty,  for  a  whole  life  policy  of  $1,000,  the  company 
had  to  pay,  first,  eighty  cents  as  the  internal  revenue  tax; 
second,  eleven  cents  as  a  local  state  tax  in  New  Jersey; 
third,  sixty -five  cents  as  a  local  state  tax  in  Kentucky;  fourth, 
eighty-two  cents  as  a  local  municipal  tax  in  Louisville,  Ky.: 
a  total  of  $2.38,  or  equal  to  7.3  per  cent,  of  the  premium  paid! 

The  Burden  of  Life  Insurance  Taxation. 

As  has  been  stated,  at  the  present  time  the  life  insurance 
companies  of  this  country  pay  annually  in  excess  of  twelve 
million  dollars  for  taxes,  licenses  and  fees,  a  vast  sum  which, 
under  normal  conditions,  would  go  toward  a  reduction  in  the 
cost  of  insurance  or  a  reduction  in  premium  rates,  but  which, 
to  the  contrary,  have  been  increased  in  consequence  of  an  un- 
wise and  unwarranted  policy  on  the  part  of  states  always  ready 
to  impose  additional  taxes  upon  an  interest  already  overtaxed. 
On  the  basis  of  the  annual  premium  income  of  all  the  companies 
in  1909,  the  taxes  paid  were  equal  to  2.15  per  cent.  If  a  com- 
parison is  made  with  the  year  1890  it  appears  that  there  has  been 
a  material  increase,  actual  as  well  as  relative,  in  the  amount 
and  proportion  of  taxes  paid  by  the  companies.  In  1890  the 
companies  paid  $2,249,148  in  taxes,  equal  to  1.42  per  cent,  of  the 
premium  income,  against  $12,126,470  in  1909,  equal  to  2.15  per 
cent,  of  the  premium  income.  In  other  words,  the  companies 
in  1909  paid  $4,100,000  in  excess  of  what  they  would  have  paid 
had  the  tax  rate  of  1890  prevailed  during  the  year  1909. 

377 


THE    TAXATION    OF    LIFE    INSURANCE    INTERESTS 

A  still  more  pertinent  illustration  of  the  burden  of  life 
insurance  taxation  is  found  in  a  comparison  of  the  sums  paid 
out  in  taxes  with  the  sums  paid  out  in  dividends  to  the  policy- 
holders. The  term  "dividends"  in  life  insurance  is  misleading, 
but  common  usage  has  so  adapted  the  term  to  the  business 
that  it  is  now  difficult  to  invent  a  new  one.  As  a  rule,  where 
the  term  "dividend"  is  used  in  life  insurance  transactions, 
the  reference  pertains  to  a  sum  of  money  which  has  originally 
been  paid  as  a  premium,  but  which  subsequent  experience 
proved  not  to  be  required.  Such  dividends  accrue  in  con- 
sequence of  a  favorable  mortality  experience,  of  a  lower  ex- 
pense rate  than  was  originally  assumed  necessary,  and 
occasionally  in  consequence  of  a  higher  rate  of  interest  earned 
than  the  expected  rate.  Such  dividends,  then,  are  not  profits 
in  the  ordinary  sense  of  the  word,  and  this  fact  was  early 
recognized  by  Mr.  Joseph  J.  Lewis,  internal  revenue  commis- 
sioner in  1863,  who,  in  his  report  that  year  to  the  Secretary  of 
the  Treasury,  made  a  strong  plea  for  the  repeal  of  the  law 
taxing  the  dividends  of  life  insurance  companies.*  How  far 
the  taxes  paid  by  life  insurance  companies  affect  the  dividend 
paying  ability  of  the  companies  is  made  clear  by  the  fact  that 
to  every  $100  paid  in  dividends  in  1909  there  were  $19.24 
paid  in  taxes.  In  other  words,  had  there  been  no  taxes  upon 
life  insurance  interests,  the  returns  to  policyholders  on  partici- 
pating contracts  could  have  been  materially  increased  in  the 
form  of  larger  dividends,  usually  applied  to  a  reduction  of  the 
premium,  or  for  the  purchase  of  additional  insurance. 

Relation  of  Taxation  to  Cost  of  Insurance. 

Briefly  summarized,  the  facts  pertaining  to  the  taxation 
of  life  insurance  companies  may  be  stated  as  follows: 

Out  of  every  $100  received  in  premiums  in  1909,  $2.15 
was  paid  out  in  taxes. 

*  Report  of  the  Secretary  of  the  Treasury,  on  the  State  of  the  Finances, 
p.  63.     Washington,  1863. 

278 


THE   TAXATION   OF   LIFE   INSURANCE   INTERESTS 

To  every  $ioo  paid  to  policy-holders  in  1909,  $3.36  was 
paid  in  taxation  or  license  fees. 

To  every  $100  paid  in  death  claims  in  1909,  $7.04  was 
paid   in   taxation   or  license   fees. 

To  every  $100  paid  in  dividends  to  policy-holders,  largely 
for  the  purpose  of  reducing  the  cost  of  insurance,  $19.24  was 
paid  in  taxation  or  license  fees. 

The  percentage  of  taxation  to  premium  income  has  in- 
creased from  1.42  in  1890  to  2.15  in  1909. 

The  ratio  of  taxation  to  dividends  to  policy-holders  has 
increased  from  15.5  in  1890  to  19.24  in  1909. 

It  is  clearly  indicated  by  these  facts  that  the  burden  of 
taxation  weighs,  indeed,  most  heavily  upon  life  insurance  com- 
panies in  the  specific  direction  of  efforts  tending  by  economical 
management  and  careful  selection  to  reduce  the  cost  of  insur- 
ance by  dividends  to  policy-holders.  Practically  every  dollar 
paid  in  taxation  or  license  fees  would  naturally  be  returned 
to  policy-holders  as  dividends,  mostly  used  for  the  purpose  of  re- 
ducing the  premiums.  The  increase  which  has  taken  place  dur- 
ing the  last  twenty  years  in  the  ratio  of  taxes  to  premium 
income  is  still  more  clearly  brought  out  in  a  comparison,  or 
rather  contrast,  of  the  increase  made  by  the  companies  in 
premium  income  with  the  increase  in  the  total  amount  paid  in 
taxation  or  license  fees.  During  the  period,  1890- 1909,  the 
premium  income  of  American  insurance  companies  increased 
257.6  per  cent,  while  the  amounts  paid  in  taxation  or  license 
fees  increased  at  the  rate  of  439.2  per  cent.  In  other  words, 
to  every  one  per  cent,  of  gain  in  premium  income  or  growth  of 
the  insurance  business,  there  has  been  an  increase  of  1.7  per 
cent,  in  taxation,  or  burdens  tending  to  materially  hinder  the 
greatest  possible  development  of  life  insurance  in  this  country. 

But  perhaps  the  most  serious  aspect  of  the  tax  question  is 
indicated  in  the  comparison  of  tax  payments  with  the  interest 
earnings  of  the  companies.  With  companies  established  for 
many  years  this  matter  is,  perhaps, not  of  quite  so  much  import- 
ance as  it  is  to  companies  recently  organized,  or  which  are  com- 

279 


THE   TAXATION   OF   LIFE   INSURANCE   INTERESTS 

paratively  new  in  the  business  of  writing  ordinary  insurance. 
While  the  total  income  of  all  the  American  life  insurance  com- 
panies from  interest  and  rents  was  $159,804,000,  the  taxes  paid 
during  1909  were  $12,126,470,  representing  7.6  per  cent.  It  has 
already  become  necessary  for  many  companies  to  calculate 
their  premiums  on  a  three  per  cent,  basis  and  an  increase  in 
premium  rates  has  been  made  necessary  because  it  is  at  present, 
and  will  probably  be  for  many  years,  impossible  to  realize  the 
high  rates  of  interest  obtainable  in  the  past. 

The  Incidence  op  Life  Insurance  Taxation. 

The  incidence  in  general  taxation  has  properly  been  called 
"the  vexed  question  in  finance,"  and,  in  the  words  of  Mr.  Mayo 
Smith,  "Who  really  pays  the  tax?  The  person  on  whom  it  is 
levied  or  some  other  person  upon  whom  the  original  sufferer 
can  roll  off  the  burden?  "  The  answer  to  this  question  with 
particular  reference  to  life  insurance  is  that  the  incidence  of 
life  insurance  taxation  unquestionably  falls  upon  the  policy- 
holders, even  though  the  company,  as  the  representative  or 
trustee  of  the  policy-holders,  pays  the  tax  in  the  first  instance. 
As  has  been  said  in  an  able  article  on  the  subject,  which 
appeared  in  the  Insurance  Critic  under  date  of  December,  1909: 

"  A  tax  on  the  company  is  really  a  tax  on  the  policy-holders 
who  form  the  company,  and  is  paid  only  by  them.  This  is 
obvious,  if  it  is  considered  that  a  company  has  no  other  fund 
than  the  proceeds  of  the  premiums  paid  by  its  policy-holders, 
and  as  the  tax  must  be  paid  in  out  of  this  sole  fund  the  conse- 
quence is  that  the  cost  of  the  insurance  to  the  policy-holders  is 
correspondingly  increased.  This  may  be  demonstrated  as  fol- 
lows: The  premium  paid  by  the  policy-holder  is  based  on 
two  things — the  assumption  of  a  rate  of  probable  mortality, 
and  the  assumption  of  a  probable  rate  of  interest  on  that  part 
of  the  premium  which  is  the  reserve,  or  laid  aside,  for  the  pay- 
ment of  future  losses.  To  this  something  is  added  as  a  pro- 
vision for  expenses  in  conducting  the  business.  These  things 
cover  the  normal  cost  of  insurance  to  the  policy-holders.  If  the 
actual  experience  as  to  mortality,  rate  of  interest  or  expense 
is  more  favorable  than  the  assumption,  whatever  is  left  is  sur- 

a80 


THE   TAXATION    OP   LIFE    INSURANCE    INTERESTS 

plus  and  is  returned  to  the  policy-holder  as  an  over-payment, 
unless  insured  on  the  non-participating  plan.  Any  tax  paid  by 
the  company  comes  out  of  that  surplus,  if  there  is  any.  It 
makes  the  return  to  the  policy-holder  just  so  much  less,  and, 
consequently,  makes  the  cost  of  his  insurance  just  so  much  more." 

In  a  similar  discussion  the  New  York  Evening  Post  of 
December  7,  1900,  referring  to  the  fact  that  the  war  tax  on  life 
insurance  was  paid  by  the  policyholders  of  the  company  said : 

"Although  this  tax  was  nominally  paid  by  the  insurance 
companies,  it  was  in  fact,  paid  by  the  policy-holders.  This 
is  an  enormous  tax  on  the  frugal  and  provident  men  who  wish 
to  invest  their  savings  in  insurance  policies  for  the  benefit  of 
their  families  when  death  shall  deprive  them  of  husband  and 
father.  It  operates  as  a  penalty  on  the  prudence  and  thrift 
which  alone  seek  this  form  of  trust  investment,  and  which, 
instead  of  being  taxed  with  this  oppressive  burden,  should  bt 
as  far  as  possible  fostered  and  encouraged." 

The  same  point  was  also  brought  out  in  the  congressional 
debates  on  the  repeal  of  the  war  revenue  act  of  1898,  when  the 
chairman  of  the  committee  in  charge  of  the  bill  said:  "Then  we 
go  a  step  further  and  take  the  stamp  tax  off  insurance  policies. 
This  latter  tax  is  paid  almost  entirely  by  the  man  who  receives 
the  insurance.  The  man  who  provides  for  the  future  of  his  family 
in  the  event  of  his  death  by  securing  a  life  insurance  or  in  pro- 
viding an  indemnity  for  the  family  in  case  the  home  should  burn 
down,  was  forced  to  pay  this  tax.  Hence  the  repeal  of  a  law 
which  in  the  first  instance  should  never  have  been  placed  on 
the  statute  book,  in  plain  recognition  of  the  plea  for  simple 
justice  that  those  who  have  voluntarily  undergone  privation 
and  self-denial  for  the  purpose  of  obtaining  economic  freedom 
for  otherwise  dependent  survivors  should  not  be  taxed  a  second 
or  a  third  time  for  the  ulterior  purposes  of  the  state.  A  tax 
on  life  insurance,  as  thus  paid  by  the  policy-holders,  is  not  a 
tax  on  their  property,  but  on  their  losses,  and  no  more  justi- 
fiable than  a  tax  on  a  house  after  it  has  burned  to  the  ground. 
The  hope  for  reform  in  life  insurance  taxation  lies  in  the  direc- 
tion of  a  true  appreciation   and  clear  comprehension  of  the 

281 


THE   TAXATION   OP   LIFE   INSURANCE   INTERESTS 

incidence  of  the  tax  and  the  general  recognition  that  this 
incidence  cannot  be  and  is  not  shifted  from  the  poHcy-holder 
upon  the  shoulders  of  someone  else  more  able  to  bear  the  burden. 
Hence  the  urgent  plea  that  this  subject  of  life  insurance 
taxation  should  receive  the  most  serious  public  consideration  to 
the  end  that  the  present  tendency  to  increase  the  already  heavy 
tax  burden  of  the  companies  be  checked  and  a  gradual  decrease 
in  the  present  tax  rate  be  brought  about.  This  plea  is  based 
on  the  fact  that  the  annual  taxes  now  exceeding  twelve 
million  dollars  fall  with  undue  severity  upon  a  class  of  people 
than  whom  none  is  more  deserving  of  the  most  generous  con- 
sideration on  the  part  of  the  state,  a  class  of  people  who  in 
the  large  majority  of  individual  cases  have  undergone  an  almost 
inconceivable  amount  of  self-denial  for  the  sole  purpose  that 
those  near  and  dear  who  are  to  live  after  them  may  live  lives 
free  from  the  taint  of  state  aid  or  private  charity.  To  tax  this 
class  of  people,  the  policy-holders  of  life  insurance  companies, 
is,  in  the  words  of  Charles  Sumner,  "A  tax  upon  a  tax,"  and 
in  his  emphatic  language,  "consequently,  barbarism."  "In- 
creased taxation,"  he  said,  "comes  out  of  the  thousands  of 
policy-holders,  and  not  from  the  companies'  officers,  as  is  often 
ignorantly  assumed,"  and  to  this  argument  there  is  no  answer 
save  that  the  states  need  the  money  and  that  the  life  insurance 
companies  can  be  conveniently  made  to  pay  it. 


CHAPTER  VII. 

THE  TAX  BURDEN  ON  LIFE  INSURANCE  POLICY- 
HOLDERS. 

Introduction. 

Life  insurance  companies  are  more  heavily  taxed  than  any- 
other  commercial  interest  and  the  rate  of  taxation  is  increasing 
more  rapidly  than  the  growth  of  the  business,  which  itself 
has  been  little  short  of  marvelous.  For  many  years  appeals 
have  been  made  to  legislative  bodies  to  refrain  from  a  further 
imposition  of  taxes,  but  the  arguments  and  pleas  have,  as  a  rule, 
been  ignored  and  treated  with  indifference  and  even  contempt. 
The  earlier  conviction  that  life  insurance  should  not  be  taxed 
at  all,  and  which  had  been  favored  by  the  foremost  of  English 
and  American  statesmen,  from  Pitt  and  Peel  to  Daniel  Webster, 
is  now  no  longer  tenable  as  a  proposition  in  public  finance 
and  the  day  seems  to  have  passed  when  considerations  of  public 
morality  and  social  economy  had  weight  in  the  deliberations 
of  legislative  assemblies,  determined  to  find  new  sources  of 
revenue  to  meet  the  results  of  extravagance  in  public  expen- 
ditures. The  state  having  the  power  to  tax,  the  power  has 
been  abused  until  a  point  has  been  reached  where  it  is  proper 
to  speak  with  entire  truth  of  the  tax  plunder  of  life  insurance 
policy-holders  at  the  present  time.     And  the  end  is  not  yet. 

The  Burden  of  Insurance  Taxes. 

For  it  is  a  plunder  and  nothing  else,  when  the  most  pru- 
dent and  unselfish  class  of  citizens  are  compelled,  through 
their  insurance  institutions,  to  pay  a  premium  income  tax,  and 
other  taxes,  fees  and  licenses  of  more  than  twelve  million  dollars 

283 


TAX    BURDEN   ON   LIFE   INSURANCE   POLICYHOLDERS 

a  year  as  a  forced  contribution  to  the  revenues  of  states  in  which 
they  may  not  reside  and  from  the  government  of  which  they 
may  not  derive  any  benefit  whatever.  Life  insurance  com- 
panies or  associations  are  not  money-making  institutions  in 
the  same  sense  as  this  term  is  used  of  banks,  transportation 
companies,  and  mercantile  undertakings  generally,  for  while 
some  are  stock  companies  and  others  are  mutual,  and  while 
still  others  combine  both  principles,  it  is  an  incontrovertible 
fact  that  they  are  not  money-making  institutions  per  se  and 
that  they  have  not  been  granted  their  charters  for  mere  money- 
making  purposes.  The  dividends  which  are  declared  and  paid 
by  stock  life  insurance  companies  are  actually  small  in  amount, 
practically  uniform  for  a  long  period  of  years  and  they  con- 
stitute but  a  relatively  small  item  in  the  aggregate  expenditures. 
The  companies  do  not  exist  for  the  purpose  of  making  money 
for  stockholders,  or  to  make  profits  for  policy-holders,  but 
they  exist  primarily  and  solely  for  the  equitable  distribution 
of  losses  which  would  otherwise  fall  with  crushing  force  upon 
unfortunate  individuals.  There,  however,  are  no  objections 
to  a  tax  upon  stockholders'  profits  any  more  than  there  are 
valid  objections  to  a  reasonable  tax  upon  the  real  and  per- 
sonal property  of  the  companies,  required  for  the  conduct  of 
their  business,  but  there  are  most  serious  objections  against  a 
substantial  tax  upon  the  premium  income,  or  the  gross  or  net 
income,  as  the  case  may  be.  Life  insurance  by  its  nature  in- 
volves delicate  and  intricate  calculations  arising  out  of  the 
science  of  life  contingencies  and  the  doctrine  of  compound 
interest,  and  the  results  anticipated  may  not  be  realized  if  an 
increasing  rate  of  taxation  deprives  the  companies  of  the  normal 
earning  power  of  money  assumed  in  the  original  premium 
calculations.  Since  the  premium  is  the  basis  of  the  contract, 
the  amount  of  which  itself  is  the  contractual  consideration, 
an  increasing  rate  of  taxation  upon  the  premium  income  may 
impair  the  contract  and  to  that  extent  make  the  ultimate 
fulfillment  of  all  contractual  obligations  impossible. 

284 


tax  burden  on  life  insurance  policyholders 

The  Social  Value  of  Insurance. 

Without  making  any  special  claim  for  life  insurance  as  a 
social  institution  of  considerable  value  to  the  state  or  the  nation, 
it  is  generally  held  as  an  incontrovertible  truth,  sustained  by 
the  experience  of  every-day  life,  that  life  insurance  is  the  only 
effective  method  of  combining  the  value  of  systematic  savings 
with  the  benefits  resulting  from  the  principle  of  association 
through  which  adequate  protection  is  secured  against  inevitable 
losses  which  would  otherwise  fall  heavily  upon  the  individual 
and  the  state.  The  insured  population,  as  a  class,  represent, 
therefore,  a  much  more  worthy  and  socially  effective  body 
of  citizens  than  the  uninsured,  since  the  former  are  very  much 
less  liable  tO  require  state  aid  in  poverty  and  support  for  widows, 
orphans  and  the  aged.  In  proportion  as  society  advances  the 
social  duty  of  providing  against  the  financial  consequences 
of  the  uncertainty  of  life  through  insurance  becomes  more 
generally  recognized,  until  the  duty  of  insurance  has  become 
accepted  as  a  universal  principle  of  right  conduct  in  the  relation 
of  the  individual  to  society  throughout  the  civilized  world. 

The  Increase  in  Insurance  Taxation. 

Over  forty  years  ago  this  aspect  of  the  business  was  clearly 
recognized  by  the  late  Elizur  Wright,  who,  in  the  Massachusetts 
Insurance  Report  for  1867,  and  at  a  time  when  the  tax  upon 
life  insurance  was  less  than  one  per  cent,  of  the  premium  in- 
come, said,  "Life  insurance  deserves  the  fostering  care  of  wise 
and  liberal  legislation.  It  should  be  freed  from  all  unnecessary 
burdens.  Government  should  as  soon  tax  its  asylums  and  hos- 
pitals as  to  seek  a  gain  or  revenue  from  the  deposits  which  fore- 
sight and  affection  has  set  apart  for  the  protection  of  thousands 
among  the  most  helpless  of  its  own  citizens.  A  tax  upon  life 
insurance  is  nothing  more  than  a  tax  upon  widows  and  orphans." 
The  suggestion,  unhappily,  was  not  heeded  and  the  tax  rate 
has  gone  up  year  after  year  until  it  has  increased  from 
seventy  cents  on  every  $100  of  premium  income  in  i860,  to 
$1.23  in  1875,  ^o  $1-42  in  1890,  and  to  $2.15  in  1909.    The  total 

285 


TAX   BURDEN   ON   LIFE   INSURANCE   POLICYHOLDERS 

sum  paid  in  taxes,  licenses,  fees  and  for  the  cost  of  state  super- 
vision in  1909  was  $12,126,470.  This  sum  was  equivalent  to 
1.62  per  cent,  of  the  gross  income  of  the  companies 
from  all  sources,  or  equivalent  to  a  rate  far  in  excess  of  the 
corresponding  rate  of  taxation  imposed  upon  commercial 
interests  generally.  No  store,  no  bank,  no  transportation 
company,  pays  taxes  upon  its  gross  income,  and  it  must  be 
self-evident  to  even  the  least  informed  or  most  indifferent, 
that  the  amount  thus  exacted  bears  a  definite  and  important 
relation  to  the  cost  of  the  insurance  sold.  It  requires  no  ex- 
tended argument  to  prove  that  in  the  nature  of  the  business 
and  by  long-established  practice  and  usage,  the  money  thus 
exacted  in  the  form  of  taxes  would  otherwise  have  been  re- 
turned to  the  policy-holders,  or  would  have  accrued  to  their 
benefit  in  some  form  or  other,  for  the  object  and  sole  purpose 
of  reducing  the  cost  of  insurance.  It  is  little  short  of  a  pre- 
posterous farce  for  legislators  to  attack  the  companies  for 
extravagance,  or  for  failure  to  reduce  expenses,  when  a  con- 
stantly increasing  tax  burden  is  placed  upon  the  companies, 
greater  than  any  sum  which  could  be  saved  by  the  most 
rigid  economy  in  the  expenses  of  agency  or  office  administration. 

Life  Insurance  Not  for  Profit. 

It  will  be  argued,  in  defence  of  the  present  system,  that 
life  insurance  ought  to  contribute  its  share  to  state  revenue, 
like  any  other  industry  or  commercial  undertaking,  but  life 
insurance  is  totally  different  from  commercial  enterprises  gener- 
ally, in  its  objects  and  aims,  as  well  as  in  its  fundamental, 
theoretical  and  practical  assumption.  It  does  not  exist,  and  the 
companies  have  not  been  formed,  for  profit-making  purposes, 
and  life  insurance  is  not  for  gain,  but  for  the  distribution  of 
losses,  having  for  its  object  the  protection  of  the  family  or 
the  individual  against  the  financial  consequences  arising  out 
of  the  uncertainties  of  life.  By  its  nature,  the  premium  (so- 
called)  cannot  be  the  exact  equivalent  of  the  ultimate  cost, 
in  consequence  of  which  a  re-distribution  is  made  from  time 

286 


TAX    BURDEN   ON    LIFE    INSURANCE   POLICYHOLDERS 

to  time,  in  the  case  of  participating  policies  in  the  form  of 
dividends,  and  in  the  case  of  non-participating  policies  in  the 
form  of  voluntary  concessions.  This  return  is  not  a  profit, 
but  evidence  of  an  over-charge,  determined  by  subsequent 
experience  and  arising  out  of  a  more  favorable  mortality  ex- 
perience, or  a  higher  rate  of  interest  earnings,  or  of  a  lower  rate 
of  general  expenses  than  was  expected.  Over-charge  may  be 
technically  called  surplus,  but  it  is  not  surplus  or  profit  in  the 
commercial  sense  of  the  term,  and  to  tax  this  over-charge  is  to 
take  an  unjust  advantage  of  the  most  thrifty  element  of  the  popu- 
lation and  to  hinder  materially,  by  increasing  the  cost,  the 
largest  possible  progress  of  this  form  of  social  protection. 
To,  therefore,  tax  the  premium  income  is  to  tax  the  policy- 
holder unjustly  and  every  injustice  in  taxation  reacts  in  time 
disastrously  upon  the  progress  of  society  itself. 

The  Menace  of  a  Tax  upon  Reserves. 

Still  more  of  a  menace  to  the  future  security  of  the  com- 
panies is  the  proposal  that  a  tax  should  be  imposed  upon  re- 
serves, so-called,  which  constitute  the  fund  set  aside  in  com- 
pliance with  law  for  the  future  discharge  of  contractual  obli- 
gations. How  that  fund  must  be  accumulated,  how  it  must 
be  invested,  how  it  must  be  conserved,  is  all  a  matter  of  statu- 
tory requirement  and  not  a  dollar  can  be  improperly  diverted 
therefrom  except  through  the  taxing  power  of  the  government. 
To  impose  a  tax  upon  this  fund  of  three-quarters  per  cent., 
as  has  been  proposed  by  the  Governor  of  Wisconsin,  would 
be  to  imperil  and  to  imperil  with  certainty  the  future  of  life 
insurance  companies  and  their  ability  to  carry  out  their  con- 
tractual obligations  with  their  policy-holders. 

The  Need  of  Tax  Reform. 

There  is  so  much  to  be  said  upon  this  subject  that,  regard- 
less of  the  fact  that  life  insurance  taxation  has  a  literature 
of  its  own,  much,  if  not  most,  of  the  work  to  bring  about  the 
necessary  reforms  remains  to  be  done.    Year  after  year  earnest 


TAX    BURDEN    ON   LIFE   INSURANCE   POLICYHOLDERS 

and  able  appeals  have  been  made  by  authorities  on  life  insur- 
ance taxation,  but  little  heed  has  been  given  to  their  pleas 
for  equity  and  justice  in  behalf  of  the  policy-holders'  interests. 
In  1908  the  whole  subject  was  ably  discussed  before  the 
Association  of  Life  Insurance  Presidents,  including  contributions 
by  Prof.  Zartman,  of  Yale,  President  Dryden,  of  The  Prudential, 
and  Samuel  B.  Smith,  of  the  Volunteer  State  Life,  and  a  reso- 
lution was  adopted  urging  life  insurance  companies  to  interest 
their  policy-holders,  as  far  as  practicable,  and  to  enlist  their 
co-operation  in  a  determined  opposition  towards  a  further 
increase  in  the  tax  rate  and  efforts  to  bring  about  a  reduction 
in  the  rate.  President  Dryden  argued  in  behalf  of  a  uniform 
rate  of  one  per  cent,  of  the  premium  income,  which,  if  adopted 
throughout  the  country,  would  save  the  policy-holders  over 
five  million  dollars  per  annum.  He  called  attention  to  the  very 
much  lower  rate  in  certain  European  countries,  and  in  par- 
ticular in  Germany,  where  the  rate  is  only  one-eighth  of  what 
is  paid  by  life  insurance  companies  in  America.  In  concluding 
an  able  and  comprehensive  argument,  Mr.  Dryden  said: 

Life  Insurance  Taxation  in  Germany. 

"If  the  German  Empire,  with  its  vast  burden  of  military, 
colonial  and  other  expenditures  far  in  excess  of  ours,  refrains 
from  taxing  its  life  insurance  policy-holders  more  than  a  quarter 
of  one  per  cent,  of  the  premium  income,  there  can  be  no  eco- 
nomic or  political  justification  for  imposing  a  tax  of  two  per 
cent,  (eight  times  as  much)  upon  the  premium  income  of  Amer- 
ican life  insurance  companies.  If  the  great  state  of  New  York, 
with  its  numerous  state  and  municipal  expenditures  of  all  kinds, 
refrains  from  taxing  life  insurance  companies  more  than  one 
per  cent,  of  the  gross  premium  income,  I  insist  that  there  is 
no  corresponding  justification  on  the  part  of  other  states  to 
tax  life  insurance  companies  at  a  higher  rate." 

Some  Results  of  Public  Education. 

Some  good,  no  doubt,  has  followed  this  appeal  to  the 
public  and  strength  has  been  given  to  the  movement  for  or- 
ganized  opposition   towards    a   further   increase    in    the    rate. 


TAX    BURDEN    ON    LIFE    INSURANCE    POLICYHOLDERS 

As  stated  by  Mr.  Robert  Lynn  Cox,  the  General  Counsel  of 
the  Association  of  Life  Insurance  Presidents, 

"In  seven  States,  therefore,  it  has  been  proposed  this  year 
(1908)  to  increase  the  tax  burdens  of  policy-holders  largely  because 
it  seemed  to  be  an  easy  and  effective  way  to  raise  revenue 
with  little  protest  from  those  who  pay  the  tax.  It  is  pleasing 
to  note  in  this  connection  that  while  bills  were  proposed  that 
would  have  added  in  the  aggregate  by  way  of  taxes  at  least 
$275,000  annually  to  the  expenses  of  the  business,  and  there- 
fore to  the  cost  of  life  insurance,  the  actual  increase  from  the 
legislation  of  the  year  will  amount  to  less  than  $25,000  per 
year.  Even  this  increase  will  be  offset  in  part  by  slight  reduc- 
tion of  rates  in  two  States.  We  believe  that  this  favorable 
showing  is  largely  the  result  of  our  efforts  to  prove  to  legisla- 
tors that  the  taxes  imposed  upon  life  insurance  increase  the 
cost,  thereby  discouraging  a  business  which  it  is  the  duty  of 
the  State  to  encourage  and  protect.  The  subject  of  taxation 
cannot,  however,  be  dismissed  from  our  mind  when  we  consider 
the  fact  that  at  least  a  dozen  States  are  facing  large  deficien- 
cies in  necessary  revenue,  and  that  under  laws  of  recent  enact- 
ment commissions  will  be  required  to  consider  the  revision  and 
readjustment  of  the  tax  laws  in  a  dozen  States  within  the  next 
eighteen  months.  That  the  interests  of  policy-holders  as  a  class 
must  be  represented  before  these  commissions  is  manifest  when 
we  consider  that  they  owe  their  existence  to  the  needs  of  several 
States  for  additional  revenue,  and  the  individual  who  most 
generally  does  not  know  that  he  is  being  taxed,  or,  knowing, 
has  no  real  opportunity  to  oppose,  furnishes  a  most  attractive 
mark  for  those  who  are  seeking  increased  revenues." 

Federal  Corporation  Tax  on  Insurance. 

While  some  of  the  states  have  refrained  from  imposing 
further  taxes,  the  federal  government  itself,  through  the  sanc- 
tion of  congress,  has,  for  the  first  time  in  its  history  imposed 
a  tax  upon  the  net  income  of  legal  reserve  life  insurance  com- 
panies, including  such  companies  in  the  same  class  as  commercial 
undertakings  generally,  organized  and  carried  on  for  profit. 
Stamp  taxes  have  been  imposed  on  two  previous  occasions, 
first,  during  the  Civil  War,  and  second,  during  the  Spanish- 

289 


TAX    BURDEN   ON   LIFE   INSURANCE   POLICYHOLDERS 

American  War — but  they  were  war  taxes  and,  perhaps,  as  such 
justifiable,  in  view  of  the  urgent  need  for  additional  revenue. 
But  for  the  federal  government  to  impose  a  tax  upon  the  net 
income  of  life  insurance  companies  during  a  time  of  profound 
peace  and  plenty,  is  but  another  evidence  that  most  of  what 
has  thus  far  been  done  to  oppose  unjust  taxation  has  been  of 
no  avail.  If  the  tax  imposed  is  really  for  revenue-raising  pur- 
poses, the  Ways  and  Means  Committee  could  easily  have  found 
other  sources  from  which  to  derive  the  necessary  amount  which 
may  be  required  for  the  needs. of  the  government.  If  the  tax 
has  been  imposed  for  other  purposes  than  revenue,  it  is  con- 
trary to  our  theory  of  government,  which  does  not  give  to  the 
federal  government  the  right  and  the  power  to  achieve  that  by 
indirection  which  it  is  specifically  excluded  from  achieving 
by  direct  enactments.  If  the  object  of  the  taxing  of  life  insur- 
ance companies  is  the  same  as  it  is  alleged  to  be  in  the  case  of 
other  corporations,  and  that  is,  to  secure  to  the  federal  govern- 
ment power  and  control  over  these  corporations,  through  the 
medium  of  taxation,  then  the  federal  government  will  secure 
the  right  and  the  power  of  federal  insurance  supervision,  which 
has  been  so  strenuously  denied  to  be  within  the  meaning  of 
the  commerce  clause  of  the  Constitution — ^but  whatever  may 
be  the  object,  whether  for  revenue  or  for  control,  the  tax  is 
contrary  to  the  interests  of  the  policy-holders,  a  hindrance  to 
the  business,  and  a  menace  to  the  future,  with  the  ever-present 
possibility  that  in  addition  to  heavy  state  taxation,  it  may 
ultimately  cause  the  companies  to  default  in  their  obligations. 
Taxation  in  any  form  is  but  another  word  for  state  inter- 
ference with  industry,  and  state  interference  is  practically 
equivalent  to  state  supervision  and  control.  If  the  United 
States  Congress  has  not  the  power  to  supervise  and  regulate 
insurance  companies,  it  would  seem  to  be  a  gross  abuse  of  the 
taxing  power  of  the  Constitution  to  use  it  to  attain  an  end  which 
is  otherwise  held  to  be  unconstitutional. 

290 


tax  burden  on  life  insurance  policyholders 

Taxation  Should  be  for  Revenue  Only. 
There  can  be  no  more  sound  principle  in  political  economy 
and  political  science  than  that  all  taxes  should  be  for  revenue 
only  and  not  for  a  hidden  or  ulterior  purpose.  That  is  not 
honest  legislation  (however  honest  the  intent)  which  attempts 
to  destroy,  regulate  or  change  by  taxation  and  thus  accomplish 
what  cannot  be  attained  otherwise.  Congress  might  have  imposed 
a  prohibitory  tax  upon  lottery  tickets,  but  Congress  preferred  to 
achieve  the  end  sought  by  prohibiting  the  lottery  companies  the 
use  of  the  mails.  In  the  words  of  the  foremost  American  authority 
on  the  theory,  and  practice  of  taxation,  the  late  Mr.  David 
A.  Wells:  "To  seek  to  make  taxation,  which  is  a  fit  contrivance 
only  for  raising  revenue  an  instrument  for  effecting  some 
ulterior  purpose,  be  it  never  so  just  and  legitimate,  to  seek  to 
use  it  for  the  attainment  of  any  other  object  than  the  obvious 
one  .of  raising  money,  is  to  lose  sight  of  the  fundamental 
principle  of  every  free  government  and  to  forbid  all  expectation 
of  recognizing  any  other  basis  for  the  exercise  of  this  great 
sovereign  power  of  the  state,  than  expediency,  which  in  turn 
will  depend  upon  the  actions,  passions  and  prejudices  of 
legislators  who  may  not  be  the  same  in  any  two  successive 
legislative  assemblies."  The  same  conclusion  is  advanced  by 
Cooley,  the  foremost  American  authority  on  the  law  of  taxation, 
in  the  statement  that  "A  burden  not  laid  for  the  purpose  of 
producing  revenue,  but  in  order  to  accomplish  some  ulterior 
object,  which  the  general  government  lacks  the  power  otherwise 
to  accomplish,  comes  under  no  definition  of  the  word  'tax'  which 
is  recognized  in  public  law."  These  objections  are  fundamental 
and  they  require  to  be  brought  home  to  every  American  citizen 
who  desires  the  continuance  of  our  form  of  government  as  it 
was  established  by  the  fathers  and  designed  by  the  wisdom  of 
true  statesmen  of  another  day. 

Moral  Aspects  of  Life  Insurance  Taxation. 
There  is  another  point  of  view  from  which  this  question 
may  be  considered   and  that  is  the  morality  of  exacting  a  tax 

291 


TAX    BURDEN    ON    LIFE    INSURANCE    POLICYHOLDERS 

from  the  contributions  of  the  most  economical,  thrifty  and 
self-sacrificing  of  citizens,  for  the  furtherance  of  more  or  less  ill- 
reasoned  projects  of  prodigal  governmental  expenditures.  It 
would  be  much  better  and  more  conducive  to  the  public  interest 
if  the  federal  and  state  legislatures  would  concern  themselves 
with  proposals  for  retrenchment  and  economy  rather  than  to 
encourage  extravagance  in  the  use  of  public  funds.  It  ap- 
pears to  be  an  accepted  axiom  of  governmental  policy  that  the 
rule  which  applies  to  every  citizen,  not  to  spend  more  than 
his  income,  does  not  apply  to  government  and  that  enormous 
burdens  may  be  imposed  upon  subsequent  generations  in  the 
furtherance  of  state  or  national  projects,  many  if  not  most  of 
which,  involve  a  waste  of  public  money  rather  than  the  achieve- 
ment of  any  beneficial  results.*  Wells,  quoting  from  Sharwood's 
Legal  Ethics,  properly  observes  with  reference  to  this  point,  that 
"One  grievous  invasion  of  property — and,  of  course,  ultimately 
of  labor,  from  whose  accumulations  all  property  grows — is  by 
government  itself,  in  the  shape  of  taxation  for  objects  not 
necessary  for  the  common  defense  and  general  welfare.  Men 
have  the  right  not  only  to  be  well  governed  but  to  be  cheaply 
governed — as  cheaply  as  is  consistent  with  the  due  mainte- 
nance of  that  security  for  which  society  was  formed  and  govern- 
ment instituted."  And  to  this  Wells  adds  the  well-known 
words  of  President  Cleveland  in  his  Message  of  December,  1888. 
"To  the  extent  that  the  mass  of  our  citizens  are  inordi- 
nately burdened  beyond  any  useful  public  purpose  and  for 
the  benefit  of  a  favored  few,  the  government  under  pretext 
of  an  exercise  of  its  taxing  powers  enters  gratuitously  into 
partnership  with  these  favorites  to  their  advantage  and  to  the 
misery  of  a  vast  majority  of  our  people."! 

*I  may  also  quote  the  words  of  Mr.  G.  Cassel  from  his  treatise  on 
the  "Nature  and  Necessity  of  Interest,"  "that  the  world  is  not  so  rich 
that  every  demand  can  be  satisfied."     (p.  73). 

fThe  Theory  and  Practice  of  Taxation,  by  D.  A.  Wells,  p.  250. 

292 


tax  burden  on  life  insurance  policyholders 

Constitutional  Aspects  of  the  Tax  Problem. 

It  is  not  the  present  purpose  to  discuss  the  question  whether 
the  Federal  Corporation  Tax  was  proposed  primarily  for  reve- 
nue-raising purposes,  or  for  the  vastly  more  important 
object  of  federal  government  supervision  and  control.  The 
constitutionality  of  the  tax  will,  unquestionably,  be  settled 
by  the  Court  of  last  appeal,  and  while  the  same  conclusion 
may  be  advanced  as  in  Gibbons  vs.  Ogden,  that  "Congress 
is  not  empowered  to  tax  for  those  purposes  which  are  in  the 
exclusive  province  of  the  state,"  it  is  also  well  to  recall  that 
the  Supreme  Court  has  held  that  the  judicial  power  cannot 
inquire  into  the  intentions  of  Congress  in  imposing  a  tax;  and 
that  if  injustice  is  done  the  only  remedy  is  in  appeal  to  the 
legislative  power  that  has  inflicted  it.  But  it  is  nevertheless 
equally  probable  that  the  Supreme  Court  will  take  cognizance 
of  the  general  state  of  the  public  mind  and  the  public  conviction, 
that  the  Corporation  Tax  was  not  enacted  primarily  for  revenue- 
raising  purposes,  but  chiefly  and  perhaps  solely  to  obtain  for 
the  federal  government  the  right  and  power  to  control  and 
supervise  state  chartered  corporations. 

The  Power  to  Tax  Is  the  Power  to  Destroy. 

The  federal  constitution,  as  interpreted  by  the  Supreme 
Court,  prohibits  the  state  from  taxing  the  agencies  and  instru- 
mentalities of  the  federal  government,  and  by  a  like  inference, 
according  to  Wells,  and  other  authorities  on  taxation,  "The 
federal  government  cannot  tax  state  instrumentalities  or 
agencies,"  and  among  these  there  are  not  any  more  important 
than  state  chartered  corporations.  If  the  federal  government 
can  rightfully  impose  a  tax  of  one  per  cent  upon  the  net  income 
of  such  corporations,  it  can  impose  any  other  tax  it  may  deem 
necessary  to  accomplish  its  purposes,  and  among  these  purposes 
in  course  of  time  may  be  the  desire  to  destroy.  If  the  federal 
government  can  rightfully  impose  a  ten  per  cent,  tax  upon  the 
circulation  of  state  banks  and  destroy  state  institutions  as  state 
banks  of  issue,  it  can  in  its  discretion  destroy,  by  the  imposition 

293 


TAX    BURDEN    ON    LIFE    INSURANCE    POLICYHOLDERS 

of  a  prohibitory  tax,  all  state  chartered  corporations,  and  among 
these  state  chartered  insurance  companies.  The  principle  has 
been  laid  down  by  the  Supreme  Court  in  the  case  of  Weston 
vs.  the  City  of  Charleston,  that  "If  the  right  to  impose  a  tax 
exists,  it  is  a  right  which  in  its  nature  acknowledges  no  limits." 

The  Inequalities  of  Life  Insurance  Taxation. 

Aside  from  constitutional  objections,  there  are,  however, 
specific  reasons  why  the  federal  government  should  not  have 
imposed  this  additional  tax  burden  upon  life  insurance  policy- 
holders. The  total  amount  of  revenue  to  be  raised  through 
the  tax  could  have  been  obtained  with  equal  facility  through 
any  one  of  the  many  stamp  taxes  imposed  during  the  Spanish- 
American  War.  The  tax  mentioned  certainly  violates  one  of 
the  canons  of  equitable  taxation,  as  defined  by  Sismondi,  the 
economist,  that  "Taxes  should  never  touch  what  is  necessary 
for  the  existence  of  the  contributor."  Life  insurance,  under 
modem  conditions,  is  an  absolute  necessity  for  maintaining 
the  American  standard  of  life  and  social  security,  and  in  exact 
proportion  as  taxes  diminish  the  returns  to  policy-holders,  the 
cost  of  insurance  is  increased  and  to  that  extent  the  largest 
development  of  the  business  is  prevented.  The  human  mind 
is  so  constituted  that  even  an  apparently  slight  difference  in 
price  will  affect  the  purchase,  and  every  possible  reduction 
which  can  be  made  in  the  cost  of  insurance  extends  the  sphere 
of  life  insurance  operation. 

The  Facts  of  Over-taxation. 

The  facts  of  over-taxation  in  life  insurance  are,  in  brief, 
as  follows:  The  189  legal  reserve  life  insurance  companies 
transacting  business  in  the  United  States  in  1909  had  a  total 
income  of  $748,027,892,  and  a  premium  income  of  $565,228,893, 
insuring  $15,480,721,211  of  family  and  individual  protection. 
The  companies  during  the  same  year  paid  $12,126,470  in  taxes, 
licenses,  fees,  and  the  cost  of  state  supervision,  equivalent  to 
1.62  per  cent,  of  the  total  income  and  2.15  per  cent,  of  the  pre- 


TAX    BURDEN    ON    LIFE    INSURANCE    POLICYHOLDERS 

mium  income.  This  enormous  sum  is  a  heavier  burden  of  tax- 
ation than  the  corresponding  burden  placed  upon  any  other 
large  financial  or  commercial  interest.  In  its  final  analysis 
every  dollar  of  taxation  is  paid  by  the  policy-holders  and  every 
dollar  represents  diminished  utiHty  of  the  true  and  ultimate 
value  of  insurance. 

Taxes  Paid  by  Policyholders  and  Beneficiaries. 

A  brief  comparison  of  the  actual  facts  of  insurance  expe- 
rience will  very  clearly  emphasize  the  truth  and  importance 
of  the  foregoing  assertion.  In  1909  the  total  amount  paid  in 
death  claims  to  insurance  policy-holders  was  $172,280,388.  Had 
there  been  no  taxes  or  fees  of  any  kind,  the  beneficiaries  could 
have  received  $7.04  more  for  every  $100  actually  received  in 
the  form  of  claim  payments.  Or,  to  consider  the  subject  from 
another  point  of  view,  during  the  same  year  there  was  paid 
out  to  life  insurance  policy-holders  $63,040,725  in  dividends, 
so-called,  including  what  is  technically  a  temporary  over- 
charge and,  in  fact,  a  return  of  that  over-charge  plus  the  interest 
accumulations  for  the  time  during  which  the  return  has  been 
withheld.  If  there  had  been  no  taxes  of  any  kind  upon 
insurance,  the  policy-holders  could  have  received  $19.24  more 
for  every  $100  actually  received  in  dividends  or  concessions, 
and  by  just  so  much  the  true  cost  of  insurance  would  have 
been  reduced  and  the  utility  of  this  method  of  family  protection 
would  have  been  correspondingly  enhanced. 

The  Insurance  Tax  Ratio  in  Germany. 

The  fifty-nine  German  life  insurance  companies  in  1907 
received  in  premiums  M.  498,434,000,  and  they  paid  out  in 
taxes  and  fees  of  all  kinds  the  sum  of  M.  1,222,000,  or  .245  per 
cent,  of  the  premium  income,  against  2.15  per  cent,  paid  out 
during  1909  by  life  insurance  companies  in  the  United  States. 
Had  the  American  companies  been  taxed  at  the  same  rate  in 
proportion  to  their  premium  income,  they  would  have  saved  to 
their  policy-holders  $10,741,659    during   1909  and  $86,269,041 

395 


TAX    BURDEN    ON    LIFE    INSURANCE    POLICYHOLDERS 

during  the  past  ten  years.  The  same  fifty-nine  German  life 
companies  had  a  total  income  during  1907  of  M.  656,606,000  of 
which  the  amount  paid  in  taxes  and  fees  for  government  super- 
vision was  0.186  per  cent.  In  contrast,  the  American  companies 
during  1909  paid  1.62  per  cent,  of  their  total  income  in  taxes, 
so  that  if  they  had  paid  taxes  in  proportion  to  the  total 
income  by  the  German  standard,  they  would  have  saved  to 
their  poHcy-holders  the  sum  of  $10,735,138  during  1909  and 
of  $86,756,708  during  the  prior  ten  years. 

The  Insurance  TA^t  Ratio  in  Canada. 

The  burden  of  life  insurance  taxation  in  Canada  is  also 
much  less  than  in  the  United  States — in  fact,  less  than  one- 
half  the  average  rate  in  proportion  to  the  premium  income. 
Twelve  of  the  principal  Canadian  companies,  with  a  premium 
income  during  1907  of  $18,801,814,  paid  out  in  taxes,  licenses, 
fees,  and  cost  of  supervision,  $200,062,  or  at  the  rate  of  1.06 
per  cent  .  Had  the  premium  income  of  American  life  insurance 
companies  during  1909  been  taxed  in  this  proportion,  the  total 
amount  saved  to  American  life  insurance  policy-holders  would 
have  been  $6,135,044  during  the  year,  or  $47,796,987  during 
the  last  decade. 

The  Insurance  Tax  Ratio  in  Australia. 
Mention  may  also  be  made  of  the  fact  that  the  insurance 
tax  ratio  in  Australia  is  much  less  than  in  the  United  States. 
The  foremost  AustraHan  company,  the  Mutual  Provident  in, 
1907  had  a  total  premuim  income  of  £2,061,067  sterling,  of 
which  it  paid  £28,736  in  taxes  of  all  kinds,  or  at  the  rate  of 
I -3 94%-  Had  the  American  companies  in  1909  been  taxed 
at  this  rate,  they  would  have  saved  to  their  policy-holders  the 
sum  of  $4,247,179. 

Income  Tax  Reductions  on  Account  of  Life  Insurance. 

In  England  and  in  some  other  foreign  countries,  deductions 
are  permitted  to  be  made  from  assessments  for  income  tax  to 

296 


TAX    BURDEN    ON    LIFE    INSURANCE    POLICYHOLDERS 

the  amount  paid  in  life  insurance  premiums,  but  in  England, 
for  illustration,  this  amount  must  not  exceed  one-sixth  of  the 
net  income  liable  to  tax.  In  1906-07  the  amount  of  income 
allowed  to  be  deducted  on  account  of  life  insurance  premiums 
amounted  to  £9,155,000,  which  at  the  average  rate  of  is.  in 
the  pound,  would  have  produced  £457,750  of  additional  revenue. 
The  amount  thus  freed  from  income  tax  was  within  two  million 
pounds  of  the  amount  exempted  in  the  same  manner  in  the  case 
of  charities,  hospitals,  and  Friendly  Societies.  As  a  further  illus- 
tration of  the  importance  of  this  concession  to  life  insurance 
policy-holders  in  England,  it  may  be  stated  that  in  the  five 
years  ending  with  1908,  over  £100,000  was  returned  to  the 
taxpayers  on  account  of  over-payments  made  in  ignorance  of 
this  salutory  provision  of  the  law. 

European  Methods  of  Insurance  Taxation. 

The  foregoing  illustrations,  derived  entirely  from  official 
sources  prove  conclusively  that  other  great  nations  have  re- 
frained from  taxing  life  insurance  as  it  is  taxed  in  the  United 
States  at  the  present  time.  The  Commissioner  of  Insurance 
of  Texas  was,  therefore,  in  error  when  he  made  the  state- 
ment that  "There  is  no  apparent  reason  for  concluding  that 
the  average  amount  of  taxation  levied  in  European  coun- 
tries, directly  or  indirectly,  in  one  form  and  another  upon 
the  life  insurance  business  is  less  than  the  average  tax  levied 
in  the  United  States."  If  the  Commissioner  had  examined  the 
revenue  accounts  of  any  single  German  life  insurance  company, 
he  could  easily  have  ascertained  that  the  tax  rate  is  very  con- 
siderably less  than  it  is  in  America.  The  total  amount  paid 
in  taxes  of  all  kinds  by  German  life  insurance  companies  was 
0.245  per  cent,  compared  with  2.15  per  cent,  of  the  premium 
income  paid  by  American  life  insurance  companies  in  1909.* 
It  is  quite  true  that  there  are  certain  documentary  stamp 
taxes  required  to  be  paid  in  various  German  states,  as  well 

♦That  is  to  say,  for  every  24c  paid  in  taxes  by  German  Life  Ins.  Cos., 
Amer.  Cos.  pay  $2.15. 

297 


TAX    BURDEN    ON   LIFE   INSURANCE    POLICYHOLDERS 

as  in  other  continental  states  and  in  England,  but  these  are 
small  in  amount,  they  are  paid  directly  by  the  policy-holder, 
and  they  are  compensated  for,  in  a  large  measure,  by  the  income 
tax  exemptions,  such  as  are  permitted  to  be  made  on  account 
of  life  insurance  premiums  paid  in  England  and  certain  other 
European  states.  It  is  not,  however,  so  much  a  question  of 
the  method  of  taxation  as  of  the  tax  burden  itself,  and  no 
German  life  insurance  company  at  the  present  time  pays  directly 
or  indirectly  in  taxes  what  is  paid  by  American  life  insurance 
companies.  In  Italy  and  some  other  countries  the  tax  rate 
is  high,  and  the  progress  of  the  business  has  been  very  slow, 
as  a  result  of  the  heavy  taxes  imposed.  But  in  the  greatest 
of  the  continental  states,  that  is,  Germany,  where  the  Imperial 
government  is  most  heavily  pressed  for  new  sources  of  revenue, 
where  new  taxes  have  been  imposed  upon  a  large  variety  of 
interests  and  instrumentalities  of  commerce,  including  taxes 
on  railway  tickets,  taxes  on  advertisements,  taxes  on  gas  and 
electricity,  and  increased  taxes  on  tobacco,  no  additional  bur- 
dens have  been  imposed  upon  life  insurance,  and,  in  fact,  through- 
out the  extended  Parliamentary  debates  no  one  has  proposed 
that  the  necessary  revenue  should  be  derived  from  the  spoliation 
of  the  trust  funds  of  life  insurance  policy-holders. 

Gross  Inequality  of  Life  Insurance  Taxes. 

Granting,  however,  for  the  sake  of  argument,  the  expediency 
of  life  insurance  taxation,  it  remains  to  be  proven  whether  or  not 
the  tax  on  premiums  is  equitably  assessed  upon  the  different  classes 
of  policy-holders.  It  is  an  accepted  rule  in  law  that  "While 
perfect  equality  is  unattainable,  only  the  statutes  based  upon 
false  and  unjust  principles,  or  producing  gross  inequality  will 
justify  the  interposition  of  the  courts."  It  requires  no  extended 
analysis  of  the  facts  in  the  case  to  prove  that  a  substantial  tax 
upon  premiums  is  productive  of  gross  injustice  in  the  case  of 
one  class  of  policy-holders  as  compared  or  contrasted  with 
another.  In  the  nature  of  life  insurance,  the  premium  is  the 
basis  of  the  contractual  relations  between  the  insured  and  the 


TAX    BURDEN    ON    LIFE    INSURANCE    POLICYHOLDERS 

company,  and  out  of  the  premium  arise  all  the  subsequent 
results  to  the  insured,  favorable  or  unfavorable,  as  the  case  may- 
be. If  the  premium  is  insufficient,  the  contract  cannot  be 
carried  into  effect,  and  it  is  on  this  ground  more  than  on  any 
other  that  legal  reserve  life  insurance  is  so  immeasurably  superior 
to  fraternal  or  so-called  insurance  on  the  assessment  plan. 
Since  the  premium  is  conditioned  by  the  age  of  the  insured 
and  the  subsequent  after  duration  of  life,  the  premium  is  neces- 
sarily lowest  in  youth  and  highest  in  old  age.  That  is  to  say, 
to  obtain  the  same  amount  of  insurance,  a  person  of  advanced 
years  has  to  pay  much  more  than  a  person  of  younger  years. 
For  illustration,  a  Whole  Life  Non-Participating  $i,ooo  Policy 
costs  $14.96  at  age  twenty  and  $38.83  at  age  fifty.  Now,  a 
premium  tax  of  two  per  cent  is  equivalent  to  thirty  cents  per 
$1,000  of  insurance  at  age  twenty,  and  to  seventy-eight  cents 
at  age  fifty.  If  that  is  not  gross  inequality  and  unjustifiable 
discrimination  in  taxation,  it  will  be  difficult  to  establish  that 
contention  in  a  more  satisfactory  manner. 

The  Insurance  Tax  Burden  on  the  Aged. 

The  importance  of  this  consideration  of  equality  and 
justice  suggests  a  somewhat  more  extended  consideration 
of  this  point.  A  policy  taken  out  at  age  twenty  on  the  Twenty 
Payment  Life  Non-Participating  plan  will  cost  annually  $22.60 
per  $1,000,  or  forty-five  cents  in  taxes,  when  the  rate  is  assumed 
to  be  two  per  cent.  In  twenty  years  the  insured  will,  therefore, 
pay  $9.00  in  taxes,  exclusive  of  the  compound  interest  accu- 
mulation on  the  amount  paid,  if  available  for  savings  or  invest- 
ment. The  same  amount  of  insurance  on  the  Twenty  Payment 
Life  plan  at  age  fifty  will  cost  $44.99,  and  the  average  annual 
amount  paid  in  taxes  will  be  ninety  cents,  or  $r8.oo  during  the 
twenty  years  of  policy  continuance.  It  is,  therefore,  self- 
evident  that  the  man  at  fifty  pays  exactly  twice  as  much  in 
taxes  as  the  man  at  twenty,  although  the  latter  is  in  a  much 
better  position  to  pay  the  tax  than  the  former.  The  disparity 
in  the  tax  burden  would  naturally  be  still  greater  at  higher  ages. 

299 


tax  burden  on  life  insurance  policyholders 

Tax  Reduction  a  Necessity. 

It  is  not  necessary  here  to  consider  other  evidences  of  ine- 
quitable taxation,  the  conflict  of  state  laws  affecting  life  insurance 
policy-holders  in  different  states,  the  evil  results  of  retaliatory 
legislation,  and  the  inequality  of  burdens  upon  different  classes 
of  policy-holders,  paying  the  same  premium  but  not  the  same 
tax.  Evidently,  uniformity  is  most  to  be  desired,  but  next 
to  uniformity,  there  should  be  permanency,  and  next  to  per- 
manency there  should  be  reduction  to  a  maximum  of  not  more 
than  one  per  cent.  This  is  the.  rate  which  was  conceded  to  be 
fair  and  equitable  by  President  Dryden  in  his  address  before 
the  Association  of  Life  Insurance  Presidents,  and  this  principle 
may  be  said  to  conform  to  the  sentiment  and  views  of  the 
majority  of  Insurance  Commissioners,  who  have  given  this 
subject  careful  and  deliberate  attention.  At  the  National  Con- 
vention of  Insurance  Commissioners,  in  1909,  the  President 
of  the  Association,  the  late  Mr.  Benjamin  F.  Crouse,  Insur- 
ance Commissioner  of  Maryland,  after  referring  to  the  very 
exhaustive  and  strong  report  made  by  a  Special  Committee 
of  the  convention  at  the  previous  meeting,  recommending 
conservatism  in  matters  of  taxation  and  a '  reduction  in  the 
tax  rate,  said,  "I  think  that  we  should  not  fail  to  re-emphasize 
the  main  features  of  that  report  and  thus  demonstrate  that 
we  propose  to  stand  firmly  in  favor  of  a  reduction  of  what 
we  believe  to  be  excessive  taxation  on  those  who  by  their 
industry,  thrift  and  frugality  are  creating  a  fund  for  old  age  or 
in  the  event  of  death  to  provide  for  those  whose  support  is  gone. 
The  insurance  business  should  undoubtedly  bear  its  fair  and 
proper  share  of  governmental  expenses,  but  should  not  be  bur- 
dened with  heavy  and  excessive  taxes  simply  because  it  can  be 
done  by  hiding  and  covering  them  up  in  the  premiums  paid  by 
policy-holders  or  by  reducing  dividends  which  otherwise  would  be 
largely  increased.  I  know  how  difficult  it  is  to  get  legislatures 
to  surrender  a  source  of  large  revenue,  such  as  the  insurance 
business,  especially  when  the  expenses  of  government  are 
greater  than  the  income ;  but  if  the  people  who  do  the  voting 

300 


TAX    BURDEN    ON    LIFE   INSURANCE   POLICYHOLDERS 

are  clearly  convinced  that  those  who  pay  insurance  premiums 
are  paying  excessive  taxation  on  their  savings,  some  relief 
will  undoubtedly  come." 

Public  Interest  in  Life  Insurance  Taxation. 

The  time  will  come,  undoubtedly,  when  policy-holders  will 
realize  and  understand  that  they  alone  are  paying  the  taxes 
imposed  upon  life  insurance  companies  out  of  their  premiums 
and  that  the  ultimate  cost  of  insurance  is  increased  in  prac- 
tically exact  proportion  to  the  increase  in  the  tax  rate. 
They  will  understand  and  better  appreciate  the  tremendously 
suggestive  fact  that  since  1865  over  $160,000,000  has  been  paid 
by  life  insurance  policy-holders  in  taxation  of  every  kind,  in- 
cluding licenses,  fees,  and  the  cost  of  state  supervision.  They 
will  protest  against  double  taxation,  they  will  object  to  the 
state  making  insurance  dear,  while  the  companies  by  every 
means  in  their  power  are  determined  to  reduce  the  cost  to  the 
lowest  possible  basis,  and  having  come  to  an  understanding 
and  a  realization  of  the  facts,  the  policy-holders,  as  voters 
under  our  representative  form  of  government,  will  not  fail  to 
make  themselves  heard  and  see  to  it  that  their  objections  re- 
ceive respectful  consideration. 

Life  Insurance  Taxation  without  Representation. 

Every  state  which  imposes  a  tax  upon  the  total  premium 
income  of  the  life  insurance  companies,  or  associations  tran- 
sacting business  therein,  violates  one  of  the  first  canons  of 
equitable  taxation,  which  is  comprehended  in  the  brief  state- 
ment that  "The  sphere  of  taxation  should  be  limited  to 
persons,  property  and  business  exclusively  within  the  political 
jurisdiction  of  the  taxing  power."  As  the  taxes  are  now  imposed 
in  some  of  the  states,  the  policy  holders  throughout  the  country 
pay  their  contribution  prorata  towards  the  support  of  state 
governments  in  which  they  themselves  have  no  interest  and  in 
which  they  have  no  advantage.  That  is  certainly  taxation  with- 
out representation,  and,  as  such,  contrary  to    the  fundamental 

301 


TAX   BURDEN    ON    LIFE   INSURANCE   POLICYHOLDERS 

conception  of  American  liberty.  Such  taxation  violates  the 
economic  axiom  that  "  No  tax  should  be  imposed  by  a  state 
or  government,  except  by  the  consent  of  the  people  by  whom 
it  is  to  be  collected,  either  directly  or  by  their  authorized  repre- 
sentative in  Congress,  Legislature,  or  Parliament,  assembled.*' 
And  such  taxes  imposed  under  whatever  circumstances,  in 
whatever  manner,  or  for  whatever  reason,  or  by  whatever 
taxing  authority,  are  contrary  to  our  accepted  principles  of 
political  justice,  and  they  should  be  resisted  by  all  proper 
means  as  a  menace  to  the  future  of  our  political  institutions. 

Injustice  of  Insurance  Franchise  Taxes. 

It  is  equally  unjust  and  in  violation  of  the  canons  of  equity 
in  matters  of  taxation  that  a  state  should  impose  a  heavy  so- 
called  franchise  tax,  which  is  but  another  term  for  exacting 
large  amounts  from  the  companies  for  which  no  equivalent 
benefit  is  rendered.  In  the  every-day  interpretation  of  the  term 
** franchise"  there  is  implied  a  special  concession,  a  special 
privilege,  or  a  special  advantage,  such  as  the  right  of  eminent 
domain  given  to  transportation  companies,  xDr  the  right  of  a 
semi-monopoly  given  to  public  service  corporations,  but  no  such 
rights  and  privileges  are  given  to  life  insurance  companies  in 
the  granting  of  their  charters.  Professor  E.  R.  A.  Seligman 
has  defined  general  corporation  franchises  as  "the  mere  privilege 
to  act  as  a  corporation,"  that  is,the  right  to  live  or  to  exist  as  a 
corporation,  and  for  any  state  to  impose  in  return  for  this  right 
a  so-called  franchise  tax  of  one  per  cent,  or  of  an  average 
of  1.62  per  cent,  of  the  gross  income,  is  a  grave  abuse  of  the 
taxing  power  and  a  serious  injustice  to  the  most  thrifty  and 
unselfish  portion  of  citizenship.  While  a  state,  no  doubt,  has 
the  right  to  impose  any  condition  it  may  see  fit  as  a  condition 
precedent  to  the  granting  of  a  life  insurance  charter,  the  state 
has  no  moral  right  at  least  to  subsequently  impose  burdens 
which  may  make  it  impossible  for  the  corporations  to  carry 
out  all  their  contract  obligations. 

302 


tax  burden  on  life  insurance  policyholders 

Ethics  of  Life  Insurance  Taxation. 

But  a  premium  income  tax  conflicts  otherwise  with  the 
canons  of  equitable  taxation,  in  view  of  the  accepted  principle 
in  all  taxation,  that  "The  tax  must  above  all  possess  the 
requisites  of  legality,  of  certainty,  of  legitimacy,  or  equality, 
and  of  morality.'*  Granting,  for  the  sake  of  argument,  that 
the  federal  corporation  tax  upon  insurance,  and  the  state 
taxes  upon  the  premium  income,  conform  to  the  first  four  of 
these  qualities,  they  certainly  do  not  meet  the  last,  or  the 
requisite  of  morality.  Every  premium  paid  on  account  of  life 
insurance  is  already  a  self-imposed  form  of  taxation,  primarily 
and  chiefly  for  the  benefit  of  others,  and  indirectly  a  contri- 
bution to  the  welfare  of  the  state.  Life  insurance  premiums 
are  voluntary  deductions  from  the  family  budget,  which  among 
the  improvident,  the  reckless,  the  indifferent  and  the  profligate 
are  expended  for  drink,  for  tobacco,  for  amusement  or  luxuries, 
in  disregard  of  every  principle  of  economy. 

A  Tax  Burden  upon  Losses  and  Calamities. 

But  if  the  principle  of  life  insurance  taxation  is  sound, 
why  does  not  the  state  impose  a  direct  tax  upon  the  payments 
to  policy-holders,  which  could  be  made  to  produce  the  same 
amount  which  is  now  exacted,  but  which  in  that  case  would  be 
clearly  apparent  and  readily  within  the  understanding  of  the 
insured.  Such  a  tax  could  be  made  progressive,  so  that  the 
claims  for  small  amounts  might  be  exempt  and  the  claims  for 
large  amounts  be  taxed  in  proportion  to  the  wealth  of  the 
beneficiary.  To  raise  the  amount  paid  in  taxes  and  for  the 
cost  of  supervision  during  1909,  amounting  to  $12,126,470, 
by  a  direct  tax  on  death  claims  would  amount  to  7.04%  of  such 
claims  paid  in  1909.  If  such  a  tax  were  imposed,  the  policy- 
holder would  know  and  know  whom  to  hold  responsible  for  a 
tax  burden  upon  losses  which  is  without  a  corresponding  instance 
in  the  whole  history  of  taxation-  It  seems  appropriate  to  include 
here  the  sarcastic  comment  of  the  New  York  Sun,  many  years 

303 


TAX    BURDEN    ON    LIFE   INSURANCE    POLICYHOLDERS 

ago,  when  the  tax  burden  was  very  much  less  indeed  than  it  is 
at  the  present  time: 

Early  Objections  to  Insurance  Taxation. 

"Iowa  and  Pennsylvania  make  life  and  death  alike  pay 
tribute  to  Caesar,  and  impose  a  toll  on  the  entrance  to  the 
graveyard  and  a  transit  fee  upon  the  avenue  which  leads  to 
the  'place  of  skulls.'  They  will  do  better  to  erase  from  their 
statute  books  a  law  so  contrary  to  public  policy,  so  hostile  to 
prudent  provision  for  widowhood  and  orphanage.  It  does  not 
strike  at  the  life  insurance  companies,  but  rebounds  upon  the 
beneficiaries  and  their  provision.  If  they  will  persist  in  the 
collection,  we  will  offer  a  hint  for  their  Committee  on  Ways 
and  Means.  When  the  body  of  the  departed  is  composed  in 
its  shroud,  let  the  coin  upon  the  closed  eyelids  escheat  to  the 
State  and  swell  the  current  revenues  of  the  treasury;  and  if 
a  specific  officer  is  created  for  the  duty,  he  may  be  designated 
as  the  Collector  of  Pennies  from  Dead  Men's  Eyes." 

No  Objection  to  Rational  Taxation. 

No  one  who  has  ever  written  with  authority  on  the  sub- 
ject of  insurance  taxation  has  objected  to  the  proper  tax- 
ation of  the  real  property  held  by  insurance  ^companies,  and  in 
1909  the  American  companies  paid  taxes  for  this  purpose  to 
the  amount  of  $2,328,229,  or  19.2  per  cent,  of  the  whole  sum 
paid  out  in  taxes.  The  remainder  of  the  taxes,  amounting 
to  $9,798,241,  was  paid  upon  premiums,  reserves,  surplus,  etc., 
or  as  license  fees  for  agents  and  the  direct  cost  of  state  super- 
vision and  examination.  It  is  difficult  to  explain  why  so  useful 
a  person  as  an  insurance  agent  should  pay  a  license  tax  to 
carry  on  his  trade,  when  a  minister,  a  doctor,  or  a  social  worker 
in  a  settlement,  is  not  required  to  pay  a  similar  tax,  to  work 
for  the  amelioration  of  human  distress  in  the  same  direction, 
and,  broadly  speaking,  primarily  for  the  same  purpose  of  self- 
support.  There  is  no  more  charity  in  the  work  of  a  doctor,  or 
a  settlement  worker,  than  in  the  work  of  a  life  insurance  agent, 
and  to  tax  the  latter  and  not  the  former  is  unjust  and  rank 
discrimination. 

304 


tax  burden  on  life  insurance  policyholders 

Unjust    Discrimination    Against    Life    Insurance    Policy- 
holders. 

If  the  premium  payments  of  life  insurance  policy-holders 
may  be  taxed  to  the  extent  of  more  than  two  per  cent.,  why 
should  it  not  be  equally  just  and  fair  to  impose  a  corres- 
ponding tax  upon  the  receipts  of  hospitals,  funds  for  foreign 
missions,  churches,  charities,  settlements,  etc.  But,  granting 
that  these  agencies  fall  within  a  narrower  definition  of  the  term 
"charities,"  there  certainly  is  no  fundamental  difference  in  the 
amounts  deposited  in  savings  banks,  which  are  exempt  from 
taxation  in  most  of  the  states,  and  upon  the  annual  deposits 
of  which  no  Legislature  would  dare  to  impose  an  annual  tax  of 
two  per  cent  and  more.  To  a  considerable  extent  the  savings 
function  in  life  insurance  performs  the  same  purpose  as  in 
savings  banks  proper,  being  subject  to  the  operation  of  the 
principle  of  compound  interest,  and  whatever  is  taken  from 
one  should,  with  equal  justice,  be  taken  from  the  other. 

An  Abuse  of  State  Power. 

And  here  it  may  be  asked,  by  what  right  does  the  state  tax 
life  insurance  premiums  and  divert  to  other  uses  the  sums 
contributed  for  a  specific  purpose,  chiefly  a  purpose  coincid- 
ing with  the  aims  and  ends  of  government  itself?  A  state 
has  not  the  right  to  impose  inequitable  and  unjust  taxes, 
although  it  has  the  power,  for  the  abuse  of  state  power  is  con- 
trary to  our  theory  of  government,  is  in  every  respect  tyranni- 
cal, and  is  contrary  to  every  rational  conception  of  political 
justice.  The  state  takes  policy-holders'  money,  but  returns  no 
proper  equivalent  in  additional  protection,  and  it  diminishes  the 
security  to  policy-holders  by  placing  in  ultimate  jeopardy  the 
funds  of  the  companies  accumulated  for  the  faithful  discharge 
of  contractual  obligations. 

Life  Insurance  is  a  Semi-Public  Function. 

Life  insurance  companies  are  semi-public  institutions  and 
they  perform  a  semi-public  function.     By  the  long-established 

305 


TAX   BURDEN   ON   LIFE   INSURANCE   POLICYHOLDERS 

system  of  state  supervision,  the  states,  in  a  large  measure,  have 
become  the  responsible  guardians  of  these  companies  and  of 
the  vast  interests  represented  by  them  in  the  form  of  trust 
funds  and  contractual  obligations.  For  the  state  and  the 
federal  governments  on  the  one  hand  to  insist  upon  the  most 
rigid  economy  in  administration,  absolute  security  in  the  in- 
vestment of  funds,  and  sound  theory  in  the  actuarial  assump- 
tions, and  on  the  other  to  tax  and  to  tax  again  the  premium 
income,  or  the  total  income,  or  the  net  income,  or  the  reserve,  or 
the  surplus,  and,  in  addition  to  these,  impose  fees  and  charges 
for  state  supervision  and  agents'  licenses,  state  or  municipal, 
presents  a  curious  contrast  in  public  policy  and  the  certainty 
of  fundamental  errors  in  public  finance.  For  if  the  states  and 
the  federal  government  continue  to  tax  and  to  take  away  a 
part  of  the  income  at  an  increasing  rate,  as  has  been  the 
case  during  the  last  twenty  years,  the  time  must  come  when 
a  further  increase  in  the  tax  rate  must  imperil  the  very 
existence  of  the  institutions.  For  the  possible  impairment  of  the 
contractual  obligation,  for  the  failure  of  the  companies  to  meet 
the  rightful  expectations  of  the  policy-holders,  the  responsi- 
bility will  rest  with  the  state  and  the  federal  governments  and 
not  with  the  administrative  officers  of  the  companies. 

Need  op  Expert  Knowledge  of  Insurance. 

It  is  perhaps  but  natural  that  the  law-makers  should  have 
but  little  expert  knowledge  on  the  subject  of  insurance,  and 
that  lawyers  who  have  given  much  time  and  thought  to  the 
practical  aspects  of  taxation  should  be  ignorant  of,  or  indif- 
ferent to,  the  rights  of  insurance  policy-holders  and  the  serious 
menace  to  their  interests  involved  in  excessive  taxation.  This 
point  of  view  was  very  ably  emphasized  in  an  address  by  the 
late  Mr.  John  A.  Finch,  one  of  the  few  members  of  the  legal 
profession  thoroughly  familiar  with  insurance  law,  theory  and 
practice,  who  said  in  part,  as  follows: 

"There  is  no  law  book  on  our  shelves  that  gives  the  faintest 
suggestion  of  the  underlying  principles  of  insurance,  nor  which 

306 


TAX    BURDEN    ON    LIFE    INSURANCE    POLICYHOLDERS 

shows  how  the  insurance  companies  are  affected  by  legislation. 
The  latest  work  on  the  law  of  insurance  is  the  most  ambitious, 
containing  four  large  volumes  now  in  press.  I  have  read  the  ad- 
vance sheets  and  while  I  commend  the  work,  I  can  but  note  its 
deficiency  in  this  respect.  The  average  lawyer,  as  a  legislator,  is 
as  ignorant  of  the  subject  of  insurance — the  principles  under- 
lying the  business — as  is  the  average  legislator  of  any  other 
vocation. 

There  is  no  business  that  can  so  readily  protect  itself  from 
the  results  of  hostile  legislation  or  harsh  interpretation  of  its 
contract  as  the  business  of  insurance.  If  compelled  to  pay  a 
heavy  tax  or  deprived  of  making  a  defense  to  an  unmerited 
claim,  the  remedy  is,  to  the  fire  insurance  company,  by  an 
increase  in  the  premium  charges;  and,  to  the  life  insurance 
company,  by  a  diminution  of  the  dividends  to  its  policyholders. 
If  the  statute  law  is  such  that  a  life  company  is  made  the  subject 
of  imposition  of  any  kind,  against  which  it  is  helpless  to  defend 
itself,  its  only  remedy  is  by  lessening  the  dividend.  The  policy- 
holder is  the  sufferer'* 

The  Problem  Re-Stated.  , 

I  have  gone  far  enough  into  the  technical  side  of  the  sub- 
ject of  life  insurance  taxation  to  emphasize  its  importance  as 
a  practical  question  confronting  the  companies  and  their  policy- 
holders at  the  present  time.  I  have  shown  that  over  twelve 
million  dollars  per  annum  are  paid  out  in  taxes,  fees,  and 
licenses,  equivalent  to  more  than  two  per  cent,  of  the 
premium  income  and  one  and  three-quarters  per  cent,  of 
the  total  income.  I  have  further  shown  that  the  tax  ratio 
has  increased  from  1.42  per  cent,  in  1890  to  2.15  per  cent,  of 
the  premium  income  in  1909,  and  it  may  safely  be  predicted 
as  a  practical  certainty  that  taxation  will  materially  increase 
in  the  next  two  years  unless  the  appeals  of  the  companies  and 
their  policy-holders  are  heeded  in  rightful  appreciation  of  the 
justice  of  their  case.  The  Federal  Corporation  Tax,  as  far  as 
it  applies  to  life  insurance  companies,  should  be  repealed  at 
the  next  session  of  Congress,  and  the  state  legislatures  through- 
out the  country  should  be  impressed  with  the  justice  and  the 
morality  of  the   suggestion  of  Mr.   Dryden,  that  the  tax  be 

307 


TAX    BURDEN    ON    LIFE   INSURANCE   POLICYHOLDERS 

reduced  to  one  per  cent,  of  the  premium  income  in  all  the  states 
where  a  higher  rate  of  taxation  is  charged  at  the  present  time. 

Official  Suggestion  for  Increased  Taxation. 
The  danger  which  confronts  life  insurance  policy-holders  is 
far  more  serious  than  generally  assumed  and  for  the  future 
security  of  the  funds  and  the  absolute  guarantee  of  contractual 
obligations  are  menaces.  This  could  not  possibly  be  better  and 
more  clearly  indicated  than  in  the  very  recent  suggestion  of 
the  Insurance  Commissioner  of  Texas,*  that  the  states  might 
rightfully  impose  a  tax  upon  the  assets  of  the  companies  equal 
to  the  general  property  tax,  which  would  yield  three  and  a 
half  times  the  amount  actually  paid  out  by  them  for  taxes, 
licenses  and  fees  of  all  kinds  at  the  present  time.  The  amount 
of  the  taxes  which  could  thus  be  raised  from  the  life  insurance 
companies  is  calculated  by  the  Insurance  Commissioner  of  Texas 
at  over  $37,000,000,  or  a  sum  equivalent  to  nearly  sixty  per  cent, 
of  the  total  amount  paid  in  dividends  to  insurance  policy- 
holders during  1909.  If  this  principle  were,  therefore,  adopted, 
dividends  to  policyholders  would  practically  cease  and  the 
rates  for  new  insurance  would,  unquestionably  have  to  be 
raised.  The  Insurance  Commissioner  of  Texas  attempts  to 
sustain  his  plea  for  increased  taxation  by  specious  arguments 
drawn  from  general  taxation  experience,  but  he  overlooks  the 
fact  that  life  insurance  by  its  nature  is  totally  different  from 
other  business  enterprises  and  that  it  is  not  primarily  con- 
ducted for  gain.  He  overlooks  the  fact  that  insurance  enor- 
mously advances  public  welfare  and  that  it  aids,  more  perhaps 
than  any  other  factor  in  the  accumulation  of  capital,  by  the 
aggregation  of  small  amounts,  most  of  which  would  otherwise 
be  wasted  and  perhaps  dissipated  in  useless  or  even  harmful 
personal  expenditures.  Life  insurance  accumulations,  in  the 
words  of  Prof.  F.  A.  Cleveland  in  his  treatise  on  "Funds  and 
Their  Uses,"t  increase  the  financial  stability  and  security  of 
the  government  itself,  and,  as  he  further  observes, 

♦The  Weekly  Underwriter,  Aug.  28,  1909,  p.  145.  fp-  297. 

308 


tax  burden  on  life  insurance  policyholders 

Life  Insurance  and  the  Public  Welfare. 

"The  effect  of  the  enormous  risks  undertaken  by  the 
insurance  companies,  therefore,  is  not  only  to  reheve  the  busi- 
ness world  of  speculative  uncertainty  in  the  numerous  relations 
to  which  it  is  applied,  but  also,  by  the  financial  conservatism 
adopted  to  secure  this  end,  the  investment  companies  assist 
very  materially  in  steadying  the  market  and,  in  time  of  strain, 
relieving  financial  distress." 

A  Final  Plea  for  Tax  Reduction  and  Uniform  Laws. 

It  is,  therefore,  unquestionably  contrary  to  public  policy 
and  opposed  to  a  rational  system  of  public  finance  that  a  heavy 
tax  burden  should  be  placed  upon  the  companies  and  that 
the  burden  should  be  continually  changed  or  shifted  by  an 
increase  in  the  rates.  However  much  advantage  there  may 
be  in  the  lack  of  uniformity  in  state  laws,  there  are  certain 
interests  which  require  uniformity  and  of  these  there  is  not 
one  more  important  than  insurance.  If  uniformity  of  state 
laws  in  the  case  of  negotiable  instruments  has  been  considered 
a  public  necessity,  sufficiently  so  to  secure  their  almost  general 
adoption,  and  if  it  is  desirable  to  have  uniform  bills  of  lading, 
then  it  would  certainly  seem  equally  desirable  that  there  should 
also  be  uniformity  in  the  method  of  insurance  taxation,  and  the 
fundamental  principle  which  should  govern  is  that  the  rate 
should  not  exceed  one  per  cent  of  the  premium  income. 

Conclusive  Evidence  op  Overtaxation. 

As  was  said  at  the  outset,  no  other  commercial  interest 
carries  a  heavy  burden  like  this  and  in  the  evidence  referred  to 
by  Wm.  J.  Graham,  proof  is  to  be  found  that  if  the  insurance 
tax  rate  upon  the  gross  premium  income  were  applied  to  com- 
mercial enterprises,  the  tax  would  be  equivalent  to  confiscation. 
An  illustration  is  given  of  a  retail  drug  store  paying  $91  in 
taxes  upon  the  gross  income  and  which,  if  taxed  at  the 
insurance  rate  of  two  per  cent.,  would  pay  $1,280.  The  case 
is  cited  of  a  retail  grocery  paying  $70  in  taxes  upon  the  grosi 

309 


TAX    BURDEN    ON    LIFE   INSURANCE   POLICYHOLDERS 

income  and  which  if  taxed  at  the  insurance  rate  of  two  per 
cent,  would  pay  $1,239.  The  case  of  a  retail  drygoods  store  is 
cited,  paying  $640  in  taxes  upon  the  gross  income,  and  which, 
if  paying  at  the  insurance  rate  of  two  per  cent.,  would  pay  $6,840.* 
Other  illustrations  could  be  given,  but  only  as  accumulative 
evidence  to  prove  that  no  commercial  interest  could  bear  the 
tax  burden  if  it  were  imposed  in  a  similar  manner  upon  the 
gross  income  as  an  index  of  tax-paying  capacity. 

Urgent  Need  of  Cooperation  of  Companies,  Policyholders 

AND  Others. 

The  time  has  come  for  an  agreement  upon  the  principles 
which  should  govern  in  life  insurance  taxation  and  it  is  a  hope- 
ful sign  that  the  International  Tax  Conference  has  for  the  third 
time  included  the  subject  in  its  program  as  a  question  of  the 
day.  What  has  been  said  has  been  rather  by  way  of  review 
of  previous  efforts  to  interest  the  public  at  large  and  to  bring 
about  an  understanding  of  the  essential  facts  of  the  problem 
and  its  economic  and  legal  aspects  to  life  insurance  policy- 
holders throughout  the  country.  An  annual  tax  burden  of 
more  than  twelve  millions  is  paid  by  them  and  by  them 
only,  and  every  addition  to  this  burden  is  a  hindrance 
to  the  growth  of  the  business  and  the  deliberate  aim  and  effort 
on  the  part  of  the  companies  to  reduce  the  cost  of  insurance. 
In  ten  years  the  business  has  increased  93.7  per  cent,  as 
measured  by  the  premium  income,  while  the  tax  burden  has 
increased  87.1  per  cent,  during  the  same  period  of  time.  The 
end  is  not  in  sight,  unless  the  policy-holders  throughout  the 
country  take  an  active  interest  in  the  subject  and  enlist  the  co- 
operation of  all  who  as  economists,  tax  reformers,  and  states- 
men, desire  to  help  and  not  to  hinder  those  who  in  their  own 
way  and  at  their  own  cost,  through  life  insurance  protection, 
carry  successfully  into  effect  the  social  and  economic  duty  of 
self-help. 

♦  The  Romance  of  Life  Insurance,  by  William  J.  Graham. 

310 


TAX    BURDEN    ON    LIFE    INSURANCE    POLICYHOLDERS 

REFERENCES 

1765  Act  of  March  22,  1765  (known  as  the  Stamp  Act).  An  Act  for 
granting  and  applying  certain  stamp  duties,  and  other  duties 
in  the  British  Colonies  and  plantations  in  America.  Provides 
for  the  regulation  and  taxation  of  marine  insurance. 

1797  First   Stamp   Act  of   the   United   States   Congress.      Chapter  II, 

sec.  4.  ist  Session.  5th  Congress.  See  also  Lex  Mercatoria 
Americana,  by  George  Caines,  Vol.  i,  p.  263. 

1798  Pitt;  In  Debates  on  the  first  Income  Duty  Bill  in  the  Commons, 

Pitt  said:  "  Laying  aside  the  proud  idea  of  the  vigour,  per- 
manence, and  renewing  energy  which  the  measure  secured, 
there  is  one  case,  which  with  view  to  the  class  who  are  really 
willing  to  save  for  the  benefit  of  those  for  whom  they  are 
bound  to  provide,  makes  some  modification.  It  is  in  favor 
of  those  who  have  recourse  to  that  easy,  certain  and  advan- 
tageous mode  of  providing  for  their  families  by  insuring  their 
lives."- 

1817  Park,  James  Allan;  Syistem  of  Marine  Insurance,  London;  refer- 
ence to  stamp  duties,  pp.  43-45;  fire  insurance  taxes,  p.  670. 

1832  Ellis,  Chas. ;  The  Law  of  Fire  and  Life  Insurance;  London;  stamp 
duties  on  fire  insurance,  p.  17;  life  insurance,  p.  102;  annuities, 
p.  189;  statutes  relating  to  insurance  taxation,  p.  221. 

1837  McCulloch,  J.  R.;  A  statistical  account  of  the  British  Empire. 
Taxation  of  insurance  companies.  Vol.  2,  p.  511. 

1844  First  Report  on  Joint-Stock  Companies;  report  of  Select  Com- 

mittee of  House  of  Commons ;  reference  to  influence  of  the  stamp 
duty  on  life  insurance  operating  as  a  check,  etc.    QQ.  1 791-94. 

1845  McCulloch,   J.    R.;   A   Treatise   on   the    Principles  and    Practical 

Influence  of  Taxation,  p.  284  et  seq.     London. 

1846  List  of  Persons,  Copartnerships  and  Corporations  Taxed  in  the 

City  of  Boston  for  the  Year  1846.  Tax  Returns  of  Massa- 
chusetts Hospital  Life  Insurance  Co.,  p.  78. 

1850  Bunyon;  Stamp  Duties  on  Insurance.  Journal  of  the  Institute 
of  Actuaries,  Vol.  I,  p.  71. 

1852  Babbage,  Charles;  Thoughts  on  the  Principles  of  Taxation  with 
reference  to  a  Property  Tax  and  its  Exceptions.     London. 

1852  Jellicoe,  C. ;  On  the  Inequitable  Operation  of  the  Property  and 
Income  Tax  Enactments,  as  regards  Life  and  other  Interests. 
Journal  of  the  Institute  of  Actuaries,  Vol.  II,  p.  213. 

1852  Hardy,  P.;  An  Expos^  of  the  Fallacy  "that  it  is  just  to  Tax 
Temporary  Annuities  at  the  same  rate  as  Perpetual  Annui- 
ties."    Journal  of  the  Institute  of  Actuaries,  Vol.  Ill,  p.  195. 

311 


TAX   BURDEN    ON   LIFE   INSURANCE   POLICYHOLDERS 

1852  Jellicoe,   C. ;  On   the  true  measure  of  Liability  in  a   system  of 

Direct  Taxation.  Journal  of  the  Institute  of  Actuaries,  Vol. 
Ill,  p.  I. 

1853  Taxes  on  Life   Policies.     Journal  of  the  Institute  of  Actuaries, 

Vol.  IV,  p.  22. 

1853  Report  of  Select  Committee  on  Assurance  Associations,  ordered 
printed  by  the  House  of  Commons,  August  16,  1853.  Refer- 
ence to  taxation,  p.  298. 

1853     Heathfield,  Richard;  Taxation,  p.  57  et  seq.     London. 

1855  The  Insurance  Monitor  and  Wall  Street  Review,  Vol.  3,  p.   18. 

New  York. 

1856  Taxation  of  life  insurance  companies.     Insurance   Monitor  and 

Wall  Street  Review,  p.  64.     New  York. 
i860     Taxation  of  Life  Insurance  Companies  in  Massachusetts,   1857- 

58;  Fifth  annual  report  of  the  insurance  commissioner,  p.  xiv. 
1862     Homans,  Shepard;  Unpublished  addresses  of,  before  life  insurance 

convention,  on  Taxation  of  Life  Insurance  Companies,     Pub. 

lished  in  part  in  Htmt's  Merchants'  Magazine,  Vol.  46,  p.  567. 
1862     Dixon,  James;  Speech  in  the  United  States  Senate  against  the 

taxation  of  insurance  companies.      Congressional  Globe,   37th 

Congress,  2nd  Session,  part  3,  p.  2335. 

1862  Sumner,    Charles;   Speech   in   the    United    States   Senate  against 

taxation  of  insurance  companies.  Congressional  Globe,  37th 
Congress,  2nd  Session,  part  3,  p.  2335  et  seq. 

1863  Association  for  the  Abolition  or  Reduction  of  the  Duty  on  Fire 

Insurance;  A  History  of  the  Agitation  for  its  abolition  or 
reduction,  showing  the  duty  to  be  bad  in  Principle,  Obstruc- 
tive to  the  Progress  of  Insurance,  and  Opposed  to  Public 
Interest.     London. 

1863  Annual  Report  of  the  Secretary  of  the  Treasury  of  the  United 
States,  p.  63. 

1863  Redfield,  Amasa  A.;  Handbook  of  the  United  States  Tax  Law. 
References  to  insurance,  pp.  32,  51,  54,  103,  104,  105,  106, 
204,  252.     New  York. 

1863  Taxpayers'  Manual,  pp.  45,  75,  77,  98,  100.     Appleton  and  Co., 

New  York. 

1864  Boutwell,  George  S. ;  A  Manual  of  the   Direct  and  Excise  Tax 

Systems  of  the  United  States,  pp.  73,  98,  107,  126,  152,  155, 
204,  219,  261.  Boston. 
1864-65  Dresser,  Horace;  The  Internal  Revenue  Laws,  Act  approved 
June  30,  1864,  as  amended  March  3,  1865.  References  to 
insurance:  agent's  license,  p.  38;  foreign,  p.  38;  broker's  license, 
p.  42.     New  York. 

312 


TAX   BURDEN   ON   LIFE   INSURANCE   POLICYHOLDERS 

1866  Laws  of  the  United  States  relating  to  internal  revenue,  in  force 
August  I,  1866,  para.  64  and  77. 

1866  Peto,  Sir  S.  Morton;  Taxation,  Its  Levy  and  Expenditure,  pp. 

58,  73,  118,  121,  220.     New  York. 

1867  Taxation  of  Life   Insurance  in   Massachusetts.     Twelfth  annual 

report  of  the  insurance  commissioner,  p.  x. 

1868  Insurance  Taxation.     Insurance  Times,  Vol.  i,  p.  52. 

1869  Internal  Revenue  Taxation  of  Life  Insurance  Companies.     Sta- 

tistical Table,  1865-68.  Hunt's  Merchants'  Magazine,  Vol. 
60,  p.  104. 

1869  Wells,   David  A.,   Special  Commissioner  of  the   Revenue  of  the 

United  States;  Official  report.  Reprinted  by  the  Cobden 
Club,  London,  1870.  Reference  to  insurance  taxation,  pp. 
77-78. 

1870  Taxation   of   Insurance  Companies   in  Maine.     Insurance   Times, 

P-  37- 

1870  Taxation  and  Dividends  in  Life  Insurance.  Insurance  Times, 
Vol.  3,  pp.  37,  53,  183. 

1870  Wright,  Elizur;  Taxation  of  Life  Insurance  Companies.  Insur- 
ance Times,  Vol.  3,  p.  265. 

1870  War   Revenue  Taxes  on   Life   insurance  companies.      Insurance 

Times,  p.  404. 

1 87 1  Committee  on  taxes,  fees,  and  deposits,  report  of.     Report  First 

National  Insurance  Convention,  p.  88.  Minority  report  of, 
and  discussion,  p.  113  et  seq. 

1871  Green,  Jacob  L.;  Taxation  of  Mutual  Life  Insurance  Companies. 
Hartford. 

187 1  Harvey,  Augustus  F. ;  Resolution  on  taxation  of  life  insurance 
companies.  Report  First  National  Insurance  Convention, 
p.  41. 

1871  Olcott,  Henry  S.;  Tabulated  digest  showing  taxes  and  other 
requirements  of  states  and  territories  as  regards  life  insurance 
companies.     Report  First  National  Insurance  Convention. 

1871  Winston,  F.  S. ;  Resolution  that  life  insurance  should  be  entirely 
exempt  from  taxation.  Report  First  National  Insurance  Con- 
vention, p.  21. 

1871  Taxation  of  Life  Insurance  is  a  Tax  upon  Prudence.     The  Spec- 

tator, November,  1871,  p.  439. 

1872  Taxation  of  Life  Insurance  Companies  in  Various  States  in  1872, 

including  important  table.     Insurance  Times,  pp.  446-447. 
1872     Taxation  of  Life  Insurance   Companies  in  the   Different  States. 
Insurance  Times,  p.  782. 

313 


TAX   BURDEN    ON   LIFE   INSURANCE   POLICYHOLDERS 

187a  Alfriend,  E.  M. ;  Resolution  on  insurance  taxation,  recommending 
a  tax  of  1%  on  the  gross  receipts  of  fire  and  marine  companies, 
and  endowment  policies  of  life  companies,  and  the  exemption 
from  taxation  of  all  life  policies  issued  on  the  lives  of  husbands 
and  fathers  for  the  benefit  of  women  and  children.  Report 
Second  National  Insurance  Convention,  p.  181. 

1872  Breese,  L. ;  Remarks  on  insurance  taxation.  Report  Second 
National  Insurance  Convention,  pp.  128,  144,  175. 

1872  Caldwell,  W.  W.;  Remarks  on  insurance  taxation.  Report  Second 
National  Insurance  Convention,  pp.  163,  184. 

1872  Committee  on  Taxation;  Supplementary  report  of.  Report 
Second  National  Insurance  Convention,  p.  71. 

1872  Hartranft,  J.  F. ;  Remarks  on  insurance  taxation.  Report  Second 
National  Insurance  Convention,  p.  133, 

1872  Harvey,  A.  F. ;  Resolution,  "  that  it  is  the  sense  of  this  Conven- 
tion that  it  is  impolitic  to  assess  taxes  upon  the  premium 
receipts  of  insurance  companies."  Report  Second  National 
Insurance  Convention,  p.  182.  Remarks  on  insurance  taxa- 
tion, p.  173. 

1872  Kelsey,  Henry  C. ;  Remarks  on  insurance  taxation.  Report 
Second  National  Insurance  Convention,  pp.  148,  182. 

1872  Reynolds,  R.  M.;  Remarks  on  insurance  taxation.  Report  Second 
National  Insurance  Convention,  p.  130. 

1872  Spencer,  J.  M.;  Remarks  on  insurance  taxation.     Report  Second 

National  Insurance  Convention,  p.  150. 

1873  Third  report  of  the  Insurance  Commissioner  of  Kansas.     Refer- 

ence to  views  of  John  Stuart  Mill  on  taxation  of  life  insur- 
ance, p.  15. 
1873  Internal  Revenue  Laws,  1861-73,  Washington,  1898.  Refers  to 
insurance  taxation  in  the  Acts  of  July  i,  1862  to  July  17,  1862, 
pp.  61-63;  Acts  of  Dec.  25,  1862  to  March,  1863,  PP-  87-88, 
91-94;  Acts  of  Jan.  3,  1864  to  July  4,  1864,  pp.  170-172,  179- 
180,  196. 

1873  Taxation  of  Life  Insurance  Companies  in  England.    Third  report. 

Royal  Commission  on  Friendly  Societies,  [C.  842]  p.  183. 

1874  Stamp  duties  on  life  policies.     Fourth  report  of  the  Royal  Com- 

mission on  Friendly  Societies,  [C.  961]  p.  132. 
1874     Taxation  of  insurance  companies  in  different  states.     Insurance 
Times,  1874,  pp.  130,  136,  137. 

1874  Walford,  Cornelius;  Insurance  Cyclopedia,  Vol.  3;  fire  insurance 

duties,  p.  419;  stamp  taxes,  p.  552  et  seq. 

1875  Wright,    Elizur;    Insurance    and    Taxation.      Insurance    Times, 

1875,  p.  45- 

314 


TAX   BURDEN    ON   LIFE   INSUBfANCE   POLICYHOLDERS 

1875     Taxation    of    life    insurance    companies.      Spectator,    1875,    pp. 

246,  367. 
J 875     Taxation   of  life   insurance   companies  in    Michigan.      Insurance 

Commissioner's  Report,  1875,  p.  6. 
1875     Doyle,    Peter;    Remarks   on    insurance    taxation.      Report   Fifth 

National  Insurance  Convention,  p,  20. 
1875     Lewis,    Charlton    T. ;    Address    on    insurance    taxation.      Report 

Fifth  National  Insurance  Convention,  pp.  16,  18. 
1875     Nye,  Joshua;   Resolution  on  insurance  taxation.      Report  Fifth 

National  Insurance  Convention,  p.  11. 
1875     Pillsbury,  Oliver;  Remarks  on  insurance  taxation.     Report  Fifth 

National  Insurance   Convention,  p.    19.     Resolution,   *' that  it 

is  wrong  in  principle  to  tax  the  aggregate  receipts  of  insurance 

companies,"  p.  27. 
1875     Row,    Samuel    W.;    Remarks    on    insurance    taxation.      Report 

Fifth  National  Insurance  Convention,  p.  19. 
1875     Smith,    R.    J.;    Address   on    insurance    taxation.      Report    Fifth 

National  Insurance  Convention,  pp.  12-15. 
1878     Mill,  John   Stuart;   Principles  of   Political  Economy,    (From  the 

Fifth  London  edition).     Vol.  2,  pp.  407-8,  463. 
1880     Taxation  of  gross  premium  income.     Insurance   Monitor,    1880, 

p.  180. 
1880     Taxation  of  Life  Insurance  in  Massachusetts.     Insurance   Com- 
missioner's Report,  1880,  p.  15. 
1880     Argument   against    the    taxation    of    life    insurance    companies. 

Spectator,  p.  254. 
1880     Taxation    of    income    of    life    insurance    companies.      Spectator, 

pp.  15s,  243. 
1880     Taxation  of  life  insurance  in  Massachusetts.     Insurance  Times, 

p.  499. 
1880     Taxation   of  life   premiums  in   Victoria.      Reprint  of  article   in 

Insurance  Gazette  of  Ireland.     Insurance  Times,   May,   1880, 

P-  295. 
1880     Insurance    Taxation    in    New    York.      Insurance    World,    Pitts- 
burgh, May,  1880,  p.  33. 
1880     National  taxation  of  life  insurance.     Insurance  Monitor,  p.  187. 
1886     Taxation  of  Life  Insurance  Companies.     Spectator,  1886,  p.  339. 
1886     Taxation  of  Certain  Insurance  and  Banking  Companies.     Report 

of  Committee  on  Claims,  House  of  Representatives,  49th  Con- 
gress, ist  Session,  Feb.  12,  1886. 
1886     Bailey,   A.    H.;   The    Income   Tax,    Its   Incidence   on   Assurance 

Companies,  Journal  of  the  Institute  of  Actuaries,  Vol.  XXV, 

P-  314. 

315 


TAX   BURDEN   ON   LIFE   INSURANCE   POLICYHOLDERS 

1886  Thomas,  H.  A.;  Income  Tax  In  a  Mutual  Fire  and  Life  Office. 

Journal  of  the  Institute  of  Actuaries,  Vol.  XXV,  p.  36. 

1887  Taxation    of    life    insurance    companies.      Weekly    Underwriter, 

1887,  Vol.  i:  pp.  291,  299,  300,  322,  403,  417,  473;  Vol.  2:  pp. 
161,  226,  243,  447- 

1888  Report  of  the  Tax  Commission  of  Maryland  to  the  General  Assem- 

bly, January,  1888,  p.  59. 

1889  Colquhoun,    E. ;    Legal    Stamp    Duty   on    Re-assurance    Policies 

effected  by  way  of  guarantee  on  a  copy  of  the  original  policy. 
Journal  of  the  Institute  of  Actuaries,  Vol.  XXVIII,  p.  166. 

1889  Newbatt,  B.;  The  Income  Tax,  Its  Incidence  on  Assurance  Com- 
panies. Journal  of  the  Institute  of  Actuaries,  Vol.  XXVIII, 
p.  280. 

1 89 1  Taxation  of  life  insurance  companies  in  Michigan — the  pro- 
posed increase  from  2%  to  3%.  Weekly  Underwriter,  1891, 
p.  203. 

1 891  Committee  on  Legislation,  rep)ort  of,  recommending  appointment 

of  committee  for  the  consideration  of  reduction  in  taxation 
upon  insurance,  etc.  Proceedings  Twenty-second  National 
Convention  of  Insurance  Commissioners,  p.  55. 

1892  Ackland,  T.  G. ;  Income  Tax  on  Annuities.    Journal  of  the  Insti- 

tute of  Actuaries,  Vol.  XXXI,  p.  81. 
1894     Report  of  the  Joint  Special  Committee  on  Taxation  to  the  Senate 

and    House    of    Representatives    of    Massachusetts.     Boston. 

pp.  II  et  seq.  (See  also  pp.  83-89.) 
1894     Gould,  John   M.  and  Tucker,   George   F. ;  The   Federal  Income 

Tax  Explained,  pp.  9.  20,  63,  65,  68.     Boston. 

1894  Barrand,  Arthur  Rhys;  Some  Legal  Points  arising  in  Life  Assur- 

ance Practice.  Taxes  on  Life  Insurance  Policies.  Journal  of 
the  Institute  of  Actuaries,  Vol.  XXXIII,  p.  226. 

1895  Faulks,  J.  E. ;  Some  Notes  on  Sinking  Fimd  Assurances.     Taxa- 

tion  and    sinking   fund   assurances   policies.      Journal   of   the 

Institute  of  Actuaries,  Vol.  XXXIV,  p.  572. 
1895     Eraser,  A.;  Income  Tax  on  Annuities  Certain.     Journal  of  the 

Institute  of  Actuaries,  Vol.  XXXIV,  p.  102. 
1895     Taxation  of  insurance  companies.      27th  Annual   Report  of  the 

Insurance  Superintendent  of  Illinois,  1895,  p.  xvi. 
1895     W3rman;    United    States    Income    Tax    Law   for    Business    Men. 

Exemption  of  Insurance  Companies  under  the  United  States 

Income  Tax  Law  of  1894,  pp.  23-24. 
189s     Relation  of  Insurance  to  the  Income  Tax.     Spectator,  Vol.  54, 

1895,  p.  167. 
1895     Taxation  of  life  insurance.    Spectator,  Vol.  53,  1895,  pp.  174,  189. 

316 


TAX   BURDEN   ON   LIFE   INSURANCE   POLICYHOLDERS 

1895  Foster,  Roger,  and  Abbot,  Everett  V.;  A  Treatise  on  the  Federal 

Income  Tax  under  the  Act  of  1894.     Pp.  129,  132.     Boston. 
,1896     Faulks,  J.  E.;  Insurance  Taxation  and  Debentures.     Journal  of 
the  Institute  of  Actuaries,  Vol.  XXXV,  p.  154. 

1896  Stamp  Act  of  the  Cape  Colony  of  1898.    Journal  of  the  Institute 

of  Actuaries,  Vol.  XXXV,  p.  383. 

1896  Taxation  of  life  policies.     Insurance  World,  1896,  p.  18. 

1897  Taxation  of  Surrender  Values  of  Life  Insurance  Policies  in  In- 

diana.    Rough  Notes,  Sept.  9,  1897. 

1897  Report  of  the   Commission  appointed  to   Inquire  into   Revising 

and  Amending  the  Laws  of  the  Commonwealth  Relating  to 
Taxation,  Boston,  1897.  Reference  to  insurance  companies: 
p.  23  et  seq. 

1898  Butler,  Ralph;  The  War  Revenue  Tax.     Indicator,  1898. 
1898     Green,  Jacob  L. ;  The  War  Taxes  on  Insurance. 

1898  Taxation  of  paid-up  life  policies  in  Indiana.  The  Vindicator, 
Feb.  I,  1898. 

1898  Fire  Insurance  and  Taxes.  Article  in  Insurance  Journal,  Hart- 
ford, Conn.,  reprinted  in  the  Weekly  Underwriter,  1898,  Vol. 

58,  P-  415- 
1898     Stamp  Duties  imder  the  Laws  of  July  1862-64,  compared  with 

H.    R.   Bill   10883,   introduced  April   23,    1898.      Published  by 

the   Bureau  of  Statistics,  Treasury  Department,  Washington, 

D.  C,  p.  1480. 
1898     Eastman,  Frank  M.;  Taxation  for  State  Purposes  in  Pennsylvania. 

Tax  on  Premiums  of  Insurance  Companies,  Chap.  VII. 

1898  War  taxation  of  life  insurance.     Extended  article,  with  letters 

from  presidents  of  insurance  companies.  Baltimore  Under- 
writer, July  5,  1898. 

1899  Circular  527,   Commissioner  of  Internal  Revenue,  Treasury  De- 

partment, Instructions  Concerning  Returns  of  Legacies,  etc., 
under  War  Revenue  Law  of  1898,  including  a  table  showing 
the  present  worth  of  an  annuity  or  life  interest,  etc.,  indirectly 
bearing  upon  the  problem  of  taxation.  See  also  regulations 
and  instructions.  Series  No.  7,  revised  Jan.  28,  1899. 

1899  Faulks,  J.  E.;  Income  Tax  as  affecting  Life  Offices.  Journal  of 
the  Institute  of  Actuaries,  Vol.  XXXVIII,  p.  297. 

1899  King,  G. ;  Allowance  for  Income  Tax,  as  affecting  the  value  of  a 
life  interest.  Journal  of  the  Institute  of  Actuaries,  Vol. 
XXXVIII,  p.  344. 

1899  Faulks,  J.  E. ;  Liability  of  Life  Assurance  Companies  to  pay  upon 
Income  arising  from  Investments  in  Foreign  Countries.  Jour- 
nal of  the  Institute  of  Actuaries,  Vol.  XXXVIII,  p.  311. 

317 


TAX   BURDEN   ON   LIFE   INSURANCE   POLICYHOLDERS 

1899  Mayo-Smith,  Richmond;  Statistics  and  Economics,  Part  2.  Ref- 
erences to  taxation,  pp.  407,  408,  419.     New  York. 

1899  Mathews,  W.  F.j  Taxation  of  insurance  companies,  methods  of 

reporting  and  collecting,  defects  and  remedies.     Address  before 
Thirtieth  Annual  Convention  of  Insurance  Commissioners. 

1900  Batterson,  James  G.;  Taxation  of  Life  Insurance.    Weekly  Under- 

writer, 1900,  p.  189. 
1900     Stone,  J.   P.;   Repeal  of  the  war  revenue   tax.      Rough   Notes 

Indianapolis,  December,  1900. 
1900     Arguments   against   Wisconsin    law    taxing   life    insurance    com- 
panies.    Extracts  and  references.     Investigator,   1900,  p.   755. 
1900     Repeal  of  the  war  revenue  tax.     Insurance  Economics,  p.  205. 
1900     Hoffman,    Frederick    L. ;    History   of    the    Prudential    Insurance 

Company  of  America,  1875-1900.    Reference  to  taxation,  p.  256. 
1900     The  War  revenue  stamp  tax  on  life  insurance  policies.  Insurance 

Critic,  December,  1900,  p.  403. 
1900     The  War  Tax  on  Insurance,  New  York  Evening  Post,  December 

7,  1900. 
1900     Dyer,  Charles  E. ;  Taxation  of  Life  Insurance  Companies,  Argu- 
ment before  the  Wisconsin  Tax  Commission,  Oct.  23,  1900. 
1900     Chamber  of  Commerce  of  the  State  of  New  York,  report  of  the 

committee  on  state  and  municipal  taxation,  submitted  October 

4,  1900,  pp.  17,  24,  25,  28,  30,  31  and  33. 
1900     Batterson,   James   G.;   Taxation,   what  it  is  and   ought  to   be. 

Address  before   Thirty-first  Annual   Convention  of  Insurance 

Commissioners. 
1900     Payne,  Sereno  E. ;  Argument  in  Congress  for  repeal  of  war  revenue 

tax.     Congressional  Record,  56th    Congress,  2nd    Session,  Vol. 

34,  p.  247. 
1900     Reducing  taxation  under  war  revenue  law.     Insurance  World, 

p.  835. 

1900  Seligman,  E.  R.  L. ;  Essays  in  Taxation.  References  to  Taxation 
of  Insurance  Companies:  pp.  139,  141-154,  168,  170,  178,  179, 
203,  205,  237,  242,  260,  279,  405,  420.     New  York. 

1900  McKinley,  Wm.,  President  of  the  United  States;  Message  to 
56th  Congress,  2nd  Session.  Recommending  reduction  in 
insurance  stamp  taxes.  Congressional  Reocrd,  Vol.  34,  Part 
I,  p.  8. 

1900  U.  S.  war  revenue  stamp  taxes  on  fire  insurance  policies.  Circular 
issued  to  companies  by  the  National  Board  of  Fire  Under- 
writers. 

1900  Merrill,  Willard;  Taxation  of  Life  Insurance  Companies,  Argu- 
ment before  the  Wisconsin  Tax  Commission,  Oct.  2,  1900. 

318 


TAX   BURDEN   ON   LIFE   INSURANCE   POLICYHOLDERS 

190 1  Chandler,  Senator;  Remarks  against  taxation  of  insurance  com- 
panies. Congressional  Record,  56th  Congress,  and  Session, 
Vol.  34,  p.  1 99 1  et  seq. 

190 1  Allison,  Senator;  Remarks  against  taxation  of  insurance  com- 
panies. Congressional  Record,  56th  Congress,  and  Session, 
Vol.  34,  p.  1987  et  seq. 

1901  Hoar,  Senator;  Remarks  against  taxation  of  insurance  companies. 
Congressional  Record,  56th  Congress,  and  Session,  Vol.  34,  p. 
1988  et  seq. 

1901  Robinson,  C.  H.;  Remarks  on  insurance  taxation.  Proceedings 
Thirty-second  Annual  Convention  of  Insurance  Commissioners, 
p.  33  et  seq. 

1901  Fryer,  Greville  E,  Treasurer,  Insurance  Company  of  North  Amer- 
ica; The  Excessive  Taxation  of  Insurance  Companies.  Paper 
prepared  for  National  Civic  Federation  Conference  on  Taxa- 
tion, Buffalo. 

1901  Taxation  of  life  insurance  companies  in  New  York.  Extended 
discussion  in  Weekly  Underwriter,  Feb.  9,  1901. 

1 90 1  Taxation  of  insurance  in  the  State  of  New  York.  Weekly  Under- 
writer, March  a,  1901. 

1901  Insurance  taxation  in  the  State  of  New  York.  Extended  article 
in  Weekly  Underwriter,  including  text  of  bill,  1901. 

1901  Hoffman,  Frederick  L. ;  Taxation  of  Life  Insurance  Interests. 
Address  at  National  Civic  Federation  Conference  on  taxation, 
Buffalo. 

1901  First  Biennial  Report  of  Wisconsin  State  Tax  Commission,  Madi- 
son, 1 90 1.  Reference  to  life  insurance  companies;  Hearings 
of  representatives,  p.  la;  Taxation,  pp.  ;^^  and  73;  Taxes  paid 
in  1899  and  1900,  p.  lai. 

1901  Hamilton,  Willard  I.;  Taxation  of  life  insurance  companies. 
Reference  in  address.     Ohio  State  University,  April  14,  1901. 

1901  Clapperton,  George;  Taxation  in  various  states  and  in  Canada, 
with  special  reference  to  the  taxation  of  corporations.  Indus- 
trial Commission,  Report  of  Vol.  XI,  Part  VII.  References 
to  insurance :  pp.  19,  33,  4a,  51,  61,  76,  117,  ia6,  149,  164. 

1 90 1  Chapman;  Treatise  on  the  English  Income  Tax.  Life  insurance 
deductions,  p.  50,  i6th  edition.     London. 

1901  Flint,  Josiah  D. ;  Taxation  of  Fire  Insurance  Companies.  Refer- 
ence to  in  "  Fire  Insurance,"  Address  to  Policyholders.  Phila- 
delphia. 

1901  Taxation  of  insurance  companies  in  Connecticut.  Reference  in 
report  of  State  Board  of  Equalization,  giving  valuation  of  the 
stocks  of  insurance  corporations,  1901. 

319 


TAX   BURDEN   ON   LIFE   INSURANCE   POLICYHOLDERS 

1 90 1  The  True  Principle  of  Fire  Insurance  Taxation.  Editorial  in 
Newark  Evening  News,  Feb.  11,  1901. 

1 90 1  Taxing  insurance  companies'  surplus.  Insurance  and  Commer- 
cial Magazine,  Feb.,  1901. 

1 90 1  The   Practice  of  Life  Insurancve  Taxation.      Public   Policy,  July 

6,  1901. 

1902  Alexander,  J.  W.;  Remarks  on  insurance  taxation.     Proceedings 

Thirty-third  Annual  Convention  of  Insurance  Commissioners, 

pp.  135,  136. 

1902  McCall,  John  A.;  Remarks  on  insurance  taxation.  Proceedings 
Thirty-third  Annual  Convention  of  Insurance  Commissioners, 
p.  81. 

1902  Robinson,  M.  H.;  A  History  of  Taxation  in  New  Hampshire. 
References  to  insurance  taxation,  pp.  119  and  131. 

1902  Decision  of  Supreme  Court  of  Illinois  in  regard  to  law  taxing 
insurance  companies  2%  on  gross  receipts,  and  that  the  same 
is  unconstitutional. 

1902  Taxation  of  life  insurance.  Discussion  in  the  Traveler's  Record, 
1902. 

1902  Taxation  of  life  insurance  companies  in  Kentucky.  The  Inves- 
tigator, Chicago,  1902. 

1902  The  Gresham  Life  Insurance  Society  and  the  Income  Tax  Ques- 
tion.    London  Review,  March  5,  1902. 

1902  A  Company  Taxed  out  of  Business.  Reference  to  Sun  Life  of 
Louisville.     Spectator,  Dec.  25,  1902. 

1902  Nicoll,  John.;  Actuarial  Aspects  of  Recent  Legislation  in  the 
United  Kingdom  and  other  Countries,  on  the  subject  of  Com- 
pensation to  Workmen  for  Accidents.  Taxation  on  Policies 
of  Insurance.  Journal  of  the  Institute  of  Actuaries,  Vol. 
XXXVI,  p.  543. 

1902  Insurance  taxation  in   Kentucky.     Weekly  Underwriter,   March 

I,  1902. 

1903  Report  of  the  State  Tax  Commission  of  Missouri,   1903,  p.  209. 

(Digest  of  revenue  laws.) 

1903  Bastable,  C.  F.;  Public  Finance,  3rd  edition,  1903,  p.  492,  Eco- 
nomics of  Insurance  Taxation. 

1903  Cooley,  Thomas  M.,  LL.  D.;  A  Treatise  on  the  Law  of  Taxation, 
including  the  law  of  local  assessments.  Third  edition,  Calla- 
ghan  and  Co.,  Chicago,  pp.  700-704,  1112,  1113. 

1903  Government  Burdens  on  Insurance  Companies  in  Various 
Countries.  Extract  from  article  in  the  Post  Magazine, 
London,  reprinted  in  The  Weekly  Underwriter,  Nov.  14,  1903, 
p.  327- 

320 


TAX    BURDEN    ON    LIFE    INSURANCE    POLICYHOLDERS 

1903  Judson,    Frederick   N.;   A   Treatise   on   the    Power  of  Taxation, 

State  and  Federal,  in  the  United  States.  St.  Louis,  1903. 
References  to  insurance:    Sections  147,  160,  183,  284,  459. 

1904  Linehan,  John   C. ;  Remarks  on  taxation  of  fraternal  and  legal 

reserve  life  insurance  companies.  Proceedings  Thirty-fifth 
Annual  Convention  of  Insurance  Commissioners,  p.  173. 

1904  In  the  Matter  of  Mistaken  Taxation.  A  Leaflet  addressed  to 
policyholders  by  the  Mutual  Life  Ins.  Co.,  of  New  York,  dated 
May  2,  1904. 

1904  Reasons  Why  there  should  be  No  Taxes  levied  on  Life  Insurance 
Premiums  or  Reserves  and  No  License  Tax  on  the  Business. 
By  Mutual  Life  Ins.  Co.  of  New  York.  Published  in  Weekly 
Underwriter,  May  7,  1904. 

1904  Some  Objections  to  the  Taxation  of  Life  Insurance  Policies  issued 
for  the  protection  of  Families.  Address  to  policyholders  in 
mutual  life  insurance  companies.  Distributed  by  the  Mutual 
Life  Insurance  Company  of  New  York.  Published  in  Insurance 
Topics,  Boston,  May,  1904. 

1904  Why  the  Members  of  the  Mutual  Life  Could  Not  be  Taxed.  In- 
surance Monitor,  1904,  p.  213. 

1904     Fouse,  L.  G. ;  Taxation  of  life  insurance  companies. 

1904  Foster,  Sydney  A.;  A  Tax  on  Thrift.  Argument  before  the  Legis- 
lative Assembly  of  Iowa,  in  favor  of  repeal  of  2^%  tax  on  life 
premiums.     Published  in  the  Insurance  World. 

1904  Address  to  Holders  of  Life  Insurance  Policies  on  the  Taxation 
of  Life  Insurance  Companies.  Mutual  Life  Insurance  Co.  of 
N.  Y. 

1904  A  Few  Queries  and  A  Few  Facts.  Address  to  Life  Insurance 
Policyholders.     Mutual  Life  Ins.  Co.  of  New  York. 

1904  The  Tax  on  Morality.  An  article  on  insurance  taxation,  pub- 
lished in  the  Statement  of  the  Mutual  Life  Ins.  Co.,  Dec,  1904. 

1904  Pattison,  John  M. ;  Taxation  of  life  insurance.  Address  before 
the  National  Association  of  Life  Underwriters,  1904. 

1904  The  Tax  Bill  of  Forty-two  Life  Insurance  Companies  Operating 
in  the  City  of  New  York.     Article  in  The  Spectator. 

1904  Faulks,  J.  E.;  The  Income  Tax  and  Perpetual  Life  Offices  in 
England  and  Wales.  Post  Magazine  and  Insurance  Monitor, 
Feb.  6,  1904. 

1904  Taxation  of  life  insurance  companies  in  France.     Article  in  Lon- 

don Review,  April  6,  1904. 

1905  La   Follette,   Gov.;  Views  of,  on  the  taxation  of  life  insurance 

companies,  in  his  message  of  1905,  reprinted  in  the  Weekly 
Underwriter,  Jan.  21,  1905. 

321 


TAX   BURDEN   ON   LIFE   INSURANCE   POLICYHOLDERS 

1905  Insurance  Taxation  in  Wisconsin.  Article  in  Weekly  Under- 
writer, Feb.  18,  1905. 

1905  Taxation  of  life  insurance  in  America.  Article  in  London  Review, 
Nov.  17,  1905. 

1905  Taxation  of  Insurance  Companies  in  Barbados.  Consular  Report, 
1905. 

1905  Fricke,  Wm.  A.;  Remarks  before  the  Assembly  Committee  on 
Insurance  of  the  State  of  Wisconsin  on  Bill  No.  434a,  March 
2,  1905. 

1905  Income  Tax,  Report  of  a  Departmental  Committee  on  [Cd.  2575], 
with  Minutes  of  Evidence  and  appendix  [Cd.  2576],  1905.  See 
index  under  Terminable  Annuities  and  Taxation  of  Life  Annui- 
ties. Questions  731-732.  Also.  p.  IX  et  seq.  of  the  report  of 
the  Committee. 

1905  Fire  Insurance  Taxes  and  Fees.  Published  by  the  Spectator 
Company,  New  York. 

1905  Return  to  the  House  of  Commons  showing  which  of  the  Colonies 

have  established  systems  of  Graduated  Income  Taxes,  London, 
1905  (Pari,  paper  196).  References  to  taxation  of  insurance 
companies,  pp.  45.  67,  95. 

1906  de   Cerenville,    Max;   Insurance  Taxation   in   Switzerland.      Pro- 

ceedings Fifth  International  Congress  of  Actuaries. 
1906     Emminghaus,    A.;    Taxation    of    Insurance.      Proceedings    Fifth 

International  Congress  of  Actuaries. 
1906     Faulks,  J.  E. ;  Insurance  Taxation  in  Great  Britain  and  Ireland. 

Proceedings  Fifth  International  Congress  of  Actuaries. 
1906     German    Society   of   Insurance   Science;    Insurance   Taxation    in 

the  German  States:     Proceedings  Fifth  International  Congress 

of  Actuaries. 
1906     Gram,    J.    P.;    Insurance    Taxation    in    Denmark.      Proceedings 

Fifth  International  Congress  of  Actuaries. 
1906     Gray,  James  M. ;  Limitations  of  the  Taxing  Power.    San  Francisco. 
1906     Herlitz,  Karl;  Insurance  Taxation  in  Sweden.     Proceedings  Fifth 

International  Congress  of  Actuaries. 
1906     Klang,    James;    Insurance    Taxation    in    Austria.      Proceedings 

Fifth  International  Congress  of  Actuaries. 
1906     Ogden,    Sydney   V.;   Insurance  Taxation   in   the   United   States. 

Proceedings  Fifth  International  Congress  of  Actuaries. 
1906     Pannier,   Georges;   Insurance  Taxation   in   France.      Proceedings 

Fifth  International  Congress  of  Actuaries. 
1906     Roth,  Paul;  Insurance  Taxation  in  Hungary.     Proceedings  Fifth 

International  Congress  of  Actuaries. 

322 


TAX   BURDEN   ON   LIFE   INSURANCE   POLICYHOLDERS 

1906  Sim,  W.  A.;  Insurance  Taxation  in  the  United  Kingdom.  Pro- 
ceedings Fifth  International  Congress  of  Actxiaries. 

1906  Zartman,    L.    W. ;    Investments    of    Life    Insurance    Companies. 

Reference  to  Insurance  Taxation,  pp.  192-193,  213-233. 

1907  Hoffman,   Frederick  L. ;   Remarks  on  insurance  taxation.      Pro- 

ceedings Thirty-eighth  Annual  Convention  of  Insurance  Com- 
missioners, p.  163, 

1907  Kingsley,  Darwin  P.;  Remarks  on  insurance  taxation.  Pro- 
ceedings Thirty-eighth  Annual  Convention  of  Insurance  Com- 
missioners, p.  121. 

1907  Prewitt,  H.  R. ;  Resolution  for  appointment  of  special  committee 
on  insurance  taxation.  Proceedings  Thirty-eighth  Annual 
Convention  of  Insurance  Commissioners,  p.  30. 

1907  Huebner,  Solomon  S. ;  The  Taxation  of  Life  and  Fire  Insurance 
Companies,  Address  at  First  National  Conference  on  State 
and  Local  Taxation,  Columbus.  Addresses  and  proceedings, 
P-  595- 

1907  Breckenridge,  Ralph  W. ;  Argument  in  behalf  of  the  National 
Board  of  Fire  Underwriters  before  the  Sub-Committee  on 
Taxation  of  the  National  Convention  of  Insurance  Commis- 
sioners, Louisville,  Ky.,  Dec.  1907. 

1907  Olin,  John  M.;  Taxation  of  Life  Insurance  Companies.  Argtiment 
submitted  on  the  different  bills  affecting  taxation  of  life  insur- 
ance companies. 

1907  Third  Biennial  Report  of  the  Wisconsin  Tax  Commission,  Madi- 
son, 1907.  References  to  insurance  companies;  (License  fees) 
pp.  172,  173;  (Mortgage  loans),  354,  357-360,  365. 

1907     Olin,  John  M. ;  Taxation  of  Life  Insurance  Companies,  a  State 
ment  of    the    Laws   in   the    Different   States,  etc.,  read  before 
the  Joint  Committee   of  the  senate  and  assembly  on  banks  and 
insurance. 

1907  Olin,  John  M.;  An  appeal  to  the  members  of  the  Assembly  on  the 
question  whether  simple  justice  shall  be  done  the  Northwestern 
Mutual  Life  Insurance  Company  in  the  matter  of  taxation. 

1907  Olin,  John  M.;  Statement  on  behalf  of  the  Northwestern  Mutual 
Life  Insurance  Company,  on  Substitute  Amendment  No.  is 
to  No.  454s. 

1907  Taxation  of  life  insurance.  Extended  article  in  the  Eastern 
Underwriter,  March  21.  1907. 

1907  Rittenhouse,  E.  E.;  Taxation  of  insurance  in  Colorado.     Bulletin 

No.  4,  Insurance  Department,  Oct.  30,  1907. 

1908  Alexander,  William;  Why  Life  Insurance   Companies  are  taxed 

and  Why  they  should  not  be  taxed.    The  Spectator,  July  2,  1908 

323 


TAX    BURDEN   ON   LIFE   INSURANCE   POLICYHOLDERS 

1908     Bradshaw,  T.,  Managing  Director,  Imperial  Life  Assurance  Co. 

Toronto;  Taxation  of  Life   Assurance   Companies  in   Canada 

Paper  read  at  Second  International  Conference  on  State  and 

Local    Taxation,    Toronto.      Addresses    and    proceedings,    p. 

343  et  seq. 
1908     Committee  of  National  Convention  of  Insurance  Commissioners. 

Report  of,  on  Life  Insurance  Taxation,  Detroit,  August,  1908. 
1908     Cox,  Robert  Lynn;  Objects  of  the  Conference  on  Insurance  Taxa 

tion  and  necessity  for  cooperation.      Second  Annual  Meeting 

Association  of  Life  Insurance  Presidents,  New  York. 
1908     Cox,    Robert  Lynn;  Taxation  of  Life   Insurance  in  the   United 

States.      Address   at    International    Conference    on    State   and 

Local  Taxation,  Toronto.     Addresses  and  proceedings,  p.  363 

et  seq. 
1908     Cox,    Robert  Lynn;   Brief  upon   the   Questions  involved   in  the 

matter  of  reporting  "  Taxes  due  or  accrued." 
1908     Dryden,    John    F. ;   Taxation   of    Life    Insurance    in    the    United 

States.     Address,  Second  Annual  Meeting  Association  of  Life 

Insurance  Presidents,  New  York. 
1908     English,  J.   L.,   Aetna   Life;   Brief   Review  of  the   Argument  in 

favor  of  the  taxation  of  life  insurance. 
1908     Fouse,  L.  G. ;  Effect  of  Insurance  Taxation  on  Social  and  Politica 

Economy.    Paper  submitted  at  Tax  Conference  of  the  Association 

of   Life  Insurance  Presidents. 
1908     Hartigan,  John  A.;  Should  the  item  of  accrued  taxes  in  reports 

be  treated  as  a    liability?      Proceedings  Thirty-ninth   Annual 

Convention  of  Insurance  Commissioners,  p.  161  et  seq. 
1908     Kelsey,    Otto,    Superintendent  of    Insurance,    New   York   State 

Fees  and  Taxes  charged  New  York  Insurance  Companies  by 

Insurance  Departments  of  other  States. 
1908     Prewitt,  H.  R.;   Plea  to  the  Governor  (Kentucky)  for  tax  reform 

in  Insurance. 
1908     Prewitt,    H.    R.;    Report   of   committee   on    insurance    taxation. 

Proceedings    Thirty-ninth    Annual    Convention    of    Insurance 

Commissioners,  p.  50  et  seq. 
1908     Rittenhouse,  E.  E. ;  Taxation  of  Insurance  Premiums. 
1908     Smith,  Samuel  Bosworth;  A  Message  from  the  South  and  West. 

Address,  Second  Annual  Meeting  Association  of  Life  Insurance 

Presidents,  New  York. 
1908     United  States  Casualty  Co.;  Brief  on  Taxation  of  Insurance. 
1908     West,  Max,  Ph.  D.;  The  Inheritance  Tax.     Reference  to  taxation 

of  life  insurance  companies,  p.  216.     New  York. 
1908     Williams,  W.  M.  J.;  The  King's  Revenue,  p.  167. 

324 


TAX   BURDEN   ON   LIFE   INSURANCE   POLICYHOLDERS 

1908  Zartman,  Lester  W.,  Ph.  D.;  Necessity  for  reform  of  life  insur- 

ance taxation.     Address,   Second  Annual  Meeting  Association 
of  Life  Insurance  Presidents,  New  York. 

1909  De  Boer,  Joseph  Arend,  President  National  Life  Insurance  Com- 

pany; Taxation  of  Level   Premium  Life   Insurance.     Addres 
at  Third  International  Conference  on   State  and  Local  Taxa- 
tion, Louisville.     Addresses  and  proceedings,  p.   129  et  seq. 

1909  Fiske,  Haley,  Vice-President  Metropolitan  Life  Ins.  Co.;  Life 
Insurance  Taxation  and  Legislation.  Address  Annual  Meeting 
of  the  Association  of  Life  Underwriters  of  Baltimore,  Md. 

1909  Foote,  Allen  R.;  The  Federal  Tax  on  Corporate  Incomes.  Text 
of  the  law  and  editorial  comments. 

1909  Graham,  William  J.;  Taxing  a  tax.  Chap.  IX  of  The  Romance 
of  Life  Insurance,  The  World  Today,  Chicago. 

1909  Hart,  W,  O. ;  The  License  Tax  System  in  Louisiana.  Paper  read 
at  the  Third  International  Conference  on  State  and  Loca 
Taxation,  Louisville.    Addresses  and  proceedings,  p.  275  et  seq. 

X909  Hoffman,  Frederick  L. ;  The  Tax  Burden  of  Life  Insurance  Policy- 
holders. Address  at  Third  International  Conference  on  State 
and  Local  Taxation,  Louisville.  Addresses  and  proceedings,  p. 
149  et  seq. 

1909  Lindabury,  Richard  V.  and  Duffield,  Edward  D. ;  Brief  sub- 
mitted for  The  Prudential  Insurance  Company  of  America  in 
the  question  of  equalization  of  taxes  before  the  New  Jersey 
Supreme  Court. 

1909  Noel,  James  W. ;  The  Taxation  of  Insurance.  Paper  read  at 
Third  International  Conference  on  State  and  Local  Taxation 
Louisville.     Addresses  and  proceedings,  p.  iii  et  seq. 

1909  Noyes,  George  H. ;  Taxation  of  Life  Insurance  Companies,  Brief 
submitted  committee  of  Wisconsin  State  Legislature. 

1909  United  States  Internal  Revenue,  Regulations  No.  31.;  Law  and 

Regulations  relative  to  excise  tax  on  Corporations,  Joint  Stock 
Companies,  Associations  and  Insurance  Companies. 

1910  Commissioners    of    His    Majesty's    Inland    Revenue,    Fifty-third 

Report  of;   London,    19 10    [Cd.    5308].      Receipts   from   stamp 

tax  on  life  insurance  policies,  p.  64. 
1 910     Stempesteuerbestimmungen  und  Tarife  fur  VersicherungsvertrSge 

von  Theodor  Ehrenfried,  Stuttgart. 
1910     Obstacles  which  Delay  Reform  of  Insurance  Taxation,  by  Thomas 

Sewall    Adams.      Address  at  Fourth    Annual    Meeting   of   the 

Association  of  Life  Insurance  Presidents. 
Annual — Statistics  of  taxes  paid,  under  Exhibit  of  Expenses,  etc.,  in 

the  insurance  yearbooks  of  The  Spectator  Co.,  New  York. 

325 


CHAPTER  VIII. 
THE  ENGLISH  ASSURANCE   COMPANIES  ACT  OF  1909. 

The  life  insurance  companies  of  England  have  been  under 
government  supervision  since  1870,  and  with  slight  amend- 
ments passed  in  187 1  and  1872  the  act  has  remained  unchanged 
until  the  close  of  last  year,  when  the  Assurance  Companies 
Act  of  1909  went  into  effect  on  December  3d.  An  interesting 
historical  account  of  the  first  act  was  published  soon  after  its 
passage  in  the  October  issue  of  The  Spectator  for  1870,  and 
in  this  article  the  origin  of  the  act  is  attributed  to  the  failure 
of  the  European  and  Albert  insurance  companies.  The  new 
act  is  in  part  the  result  of  similar  causes,  for  in  1906,  after  the 
disclosures  of  the  New  York  legislative  investigation  and  the 
subsequent  failure  of  the  Mutual  Reserve,  which  had  trans- 
acted a  considerable  amount  of  business  in  England,  a  special 
committee  of  the  House  of  Lords  was  appointed  "to  inquire 
and  report  as  to  what  steps  should  be  taken,  by  deposit  of 
funds  or  otherwise,  to  provide  adequate  security  for  British 
policy-holders  in  life  insurance  companies  which  have  their 
chief  office  outside  the  United  Kingdom,  but  which  carry  on 
business  in  this  country."  The  report  of  that  committee  and 
the  hearings  which  were  had  led  to  a  serious  consideration  of 
necessary  changes  in  the  law  of  1870,  and  accordingly  the 
Government  brought  in  a  bill  which,  after  some  debate  in  both 
the  House  of  Commons  and  the  House  of  Lords,  was  passed  just 
before  the  close  of  the  session. 

The  new  act  is  in  many  respects  a  decided  innovation  in 
British  insurance  legislation,  since  for  the  first  time  the  super- 
visory powers  of  the  Board  of  Trade  are  extended  to  fire  and 
accident  insurance  companies.     Employers'  liability  insurance 

326 


ENGLISH    ASSURANCE    COMPANIES    ACT    OF    I909 

companies  had  been  brought  within  the  scope  of  the  act  of 
1870  by  an  act  passed  in  1907.  The  whole  law  is  now  con- 
solidated into  a  single  act,  which  also  includes  bond  invest- 
ment business,  which  is  defined  as  "the  business  of  issuing 
bonds  or  endowment  certificates  by  which  the  company,  in 
return  for  subscriptions  payable  at  periodical  intervals  of 
two  months  or  less,  contracts  to  pay  the  bond  holder  a  sum 
at  a  future  date,  and  not  being  life  assurance  business  as  here- 
inbefore defined."  The  act  applies  to  all  persons  or  companies 
not  registered  under  the  acts  relating  to  friendly  societies 
or  trades  unions  which  carry  on  in  the  United  Kingdom  life 
assurance,  fire  insurance,  employers'  liability  insurance,  and 
bond  investment  business.  Every  assurance  company  is  re- 
quired to  deposit  and  keep  on  deposit  with  the  Paymaster- 
General,  for  and  on  behalf  of  the  Supreme  Court,  the  sum 
of  ;^2 0,000.  The  Paymaster-General  is  required  to  invest 
this  amount  in  such  securities  as  are  usually  accepted  by  the 
court  for  the  investment  of  funds  placed  under  its  adminis- 
tration as  the  company  may  select.  The  interest  earnings, 
of  course,  are  payable  to  the  company  making  the  deposits. 
A  company  conducting  more  than  one  branch  of  insurance  is 
required  to  make  a  separate  deposit  of  ;;£2o,ooo  for  each  class 
of  business  transacted. 

A  distinction  is  made  for  the  first  time  in  English  law 
between  insurance  and  assurance,  the  former  being  considered 
to  apply  to  all  insurance  business  other  than  the  life  branch, 
which  is  defined  as  assurance  separate  and  distinct  from  every 
other  branch  of  the  business.  In  this  sense  it  is  provided  that 
"In  the  case  of  an  assurance  company  transacting  other  business 
besides  that  of  assurance  or  transacting  more  than  one  class 
of  assurance  business,  a  separate  account  shall  be  kept  of  all 
receipts  in  respect  of  the  assurance  business  or  of  each  class 
of  assurance  business,  and  the  receipts  in  respect  of  the  as- 
surance business,  or,  in  the  case  of  a  company  carrying  on 
more  than  one  class  of  assurance  business,  of  each  class  of 
business,   shall  be  carried  to  and  form  a  separate  assurance 

327 


ENGLISH    ASSURANCE    COMPANIES    ACT    OF    1909 

fund  with  an  appropriate  name."  It  is  provided,  however,  that 
nothing  in  this  section  shall  require  the  investments  of  any- 
such  fund  to  be  kept  separate  from  the  investments  of  any- 
other  fund. 

The  practice  of  permitting  every  assurance  company 
to  make  its  report  according  to  the  financial  year  of  the  date 
of  its  own  selection  is  continued.  On  this  account  the  Board 
of  Trade  returns  are  never  an  exact  statement  of  the  insurance 
business  in  the  United  Kingdom  for  any  given  year,  although 
the  practice  of  making  the  business  year  end  on  December  31st 
is  extending.  It  would  have  been  a  decided  improvement  in 
the  law  if  all  companies  had  been  required  to  make  their  business 
years  end,  as  is  required  of  American  companies,  on  December 
31st. 

The  provisions  which  apply  to  accounts  and  balance  sheets, 
actuarial  reports,  statements  of  assurance  business,  reports 
to  shareholders,  and  audits  of  accounts  do  not  require  par- 
ticular consideration.  They  conform  in  all  essentials  to  those  of 
the  act  of  1870. 

Since  most  of  the  insurance  companies  are  also  subject 
to  some  of  the  clauses  of  the  earlier  Companies  Consolidation 
Act  of  1845,  and  the  act  of  the  same  title  of  1908,  the 
new  Assurance  Companies  Act  does  not  repeat  the  require- 
ments which  apply  with  reference  to  the  provisions  of  the  acts 
just  cited.  Every  assurance  company,  however,  which  has 
not  registered  under  the  companies  acts,  or  which  has  not 
incorporated  in  its  deed  of  settlement  section  10  of  the  Com- 
panies Clauses  Consolidation  Act  of  1845,  is  required  to  keep  a 
Shareholders'  Address  Book,  in  accordance  with  the  provisions 
of  that  section,  and  is  further  required,  on  the  application 
of  any  shareholder  or  policyholder  of  the  company  to  furnish 
him  a  copy  of  such  book  on  payment  of  a  sum  not  exceed- 
ing 6  pence,  for  every  hundred  words  required  to  be  copied. 
Provisions  referring  to  the  deed  of  settlement,  to  the  publica- 
tion of  authorized,  subscribed  and  paid-up  capital,  to  amalga- 
mation or  transfer  of  business,   and  to   special   provisions  as 

328 


ENGLISH    ASSURANCE    COMPANIES    ACT    OF    1909 

to  the  winding  up  of  assurance  companies,  are  not  of  parti- 
cular interest  nor  from  long  established  custom  and  precedent 
in  English  insurance  or  corporation  legislation.  An  important 
provision,  however,  is  section  i8,  which  empowers  the  court, 
in  the  case  of  an  assurance  company  which  has  been  proved 
to  be  unable  to  pay  its  debts,  to  reduce  the  amounts  of  the 
contracts  of  the  company  upon  such  terms  and  subject 
to  such  conditions  as  the  court  may  think  just,  in  place  of 
liquidation. 

The  penalties  for  non-compliance  with  the  various  pro- 
visions of  the  act  are  limited  to  a  sum  not  exceeding  £ioo,  or 
in  the  case  of  continuing  default,  to  a  sum  not  exceeding  £$o 
for  every  day  during  which  the  default  continues,  and  every 
director,  manager  or  secretary,  or  other  officer  or  agent  of  the 
company,  who  is  knowingly  a  party  to  the  default,  is  made 
liable  to  a  like  penalty,  which,  in  continuance  of  such  default 
shall  be  a  ground  on  which  the  court  may  order  the  liquidation 
of  the  company  in  accordance  with  the  Companies  Consolida- 
tion Act  of  1908. 

The  act  does  not  apply  to  the  National  Debt  Commissioners, 
or  the  Postmaster-General,  acting  under  the  authorities  vested 
in  them  respectively  by  the  Government  Annuities  Acts  of 
1829-88,  and  the  Post  Office  Savings  Bank  Acts  of  1861-1908.  The 
act  also  does  not  apply  to  a  member  of  Lloyds  or  to  any  other 
association  of  underw'riters  approved  by  the  Board  of  Trade, 
which  carries  on  assurance  business  of  any  class,  provided 
that  it  complies  with  the  requirements  set  forth  in  the  eighth 
schedule  of  the  act,  which  requires  that  "every  underwriter 
shall  deposit  and  keep  deposited  in  such  manner  as  the  Board 
of  Trade  may  direct  a  sum  of  two  thousand  pounds.  .  .  .  The 
sum  so  deposited  shall,  so  long  as  any  liability  under  any  policy 
issued  by  the  underwriter  remains  unsatisfied,  be  available  solely 
to  meet  claims  under  such  policies."  It  is  further  provided 
with  reference  to  this  class  of  business,  that  the  underwriter 
shall  furnish  every  year  to  the  Board  of  Trade  a  statement 
in  such    form   as    may  be  prescribed    by  the    Board    showing 

329 


ENGLIPiH    ASSURANCE    COMPANIES    ACT    OF    I909 

the  extent  and  character  of  the  life  assurance  business  effected 
by  him. 

Passing  over  the  provisions  which  apply  to  special  classes 
of  business,  and  the  Parliamentary  definitions  of  such  classes, 
the  most  important  section  of  the  whole  act  is  the  36th,  which 
contains  various  provisions  as  to  collecting  societies  and  indus- 
trial assurance  companies.  By  this  section  a  large  amount  and 
a  considerable  proportion  of  industrial  business,  chiefly  as  trans- 
acted by  collecting  friendly  societies,  is  legalized  and  raised  to 
the  status  of  a  legitimate  insurance  business.  The  act  provides 
in  part  that: 

"No  policy  effected  before  the  passing  of  this  Act  with  a 
collecting  society  or  industrial  assurance  company  shall  be 
deemed  to  be  void  by  reason  only  that  the  person  effecting 
the  policy  had  not,  at  the  time  the  policy  was  effected,  an 
insurable  interest  in  the  life  of  the  person  assured,  or  that 
the  name  of  the  person  interested,  or  for  whose  benefit  or  on 
whose  account  the  policy  was  effected,  was  not  inserted  in  the 
policy,  or  that  the  insurance  was  not  one  authorized  by  the 
Acts  relating  to  friendly  societies,  if  the  policy  was  effected 
by  or  on  account  of  a  person  who  had  at  the  time  a  bona  fide 
expectation  that  he  would  incur  expenses  in  connection  with 
the  death  or  funeral  of  the  assured,  and  if'  the  sum  assured  is 
not  unreasonable  for  the  purpose  of  covering  those  expenses, 
and  any  such  policy  shall  enure  for  the  benefit  of  the  person 
for  whose  benefit  it  was  effected  or  his  assigns." 

Most  of  the  Parliamentary  debate  which  was  had  upon 
the  act  had  reference  to  this  particular  section,  upon  which 
there  was  evidently  a  strong  division  of  opinion.  The  whole 
discussion  of  the  act  is  contained  in  the  debates  of  the 
House  of  Lords  for  July  30  and  31,  August  31,  and  Sep- 
tember 14;  and  the  House  of  Commons  for  November  4,  24 
and  25.  Among  others,  Mr.  Keir  Hardie,  the  socialist,  par- 
ticipated in  this  debate  on  several  occasions,  strongly  recom- 
mending the  Government  to  appoint  a  Royal  Commission  to 
make  an  inquiry  into  the  whole  subject  of  industrial  insurance, 
previous  to  the  passage  of  the  act.  This  suggestion,  however, 
was  successfully  opposed  as  needless  by  Mr.  Winston  Churchill, 

330 


ENGLISH    ASSURANCE    COMPANIES    ACT    OF    1909 

the  President  of  the  Board  of  Trade,  in  immediate  charge  of 
the  bill  for  the  Government. 

The  act  came  into  operation  on  July  i,  1910,  except  sec- 
tion 36,  referring  to  friendly  societies  and  industrial  insurance 
companies,  which  came  into  operation  on  its  passage.  The 
act  must  be  considered  an  incomplete  piece  of  legislation,  due 
partly  to  the  hurried  consideration  which  was  given  to  many 
of  its  essential  provisions  during  the  closing  sessions  of  Par- 
liament. The  act  fails  to  give  a  clear  definition  of  insurable 
interest  as  applicable  to  Ordinary  life  offices,  the  practice  of 
which  will  remain  subject  to  the  antiquated  statute  known 
as  the  gambling  act.  The  new  act,  however,  meets  the 
most  pressing  needs  of  the  business  of  insurance,  and  ex- 
tends to  the  Board  of  Trade  all  the  desired  powers  for 
adequate  supervision  as  occasion  may  require.  The  legisla- 
tion is  in  conformity  to  English  ideas  of  a  minimum  degree 
of  paternalism  and  the  largest  amount  of  possible  confidence 
in  the  integrity  and  ability  of  corporation  management. 
Considering  the  long  experience  which  has  been  had  with  the 
simple  but  decidedly  effective  provisions  of  the  act  of  1870, 
and  the  remarkably  clean  and  satisfactory  history  of  life  insur- 
ance in  England  during  the  last  forty  years,  the  new  act  merely 
gives  emphasis  to  provisions  of  law  which  have  long  been  in 
operation  and  amends  the  law  in  the  few  directions  in  which 
it  was  found  necessary.  The  act  is  in  decided  contrast  to  the 
enormous  amount  of  statutory  legislation  on  the  subject  of 
insurance  in  the  United  States  and  the  conflict  and  confusion 
of  law  on  the  subject  of  insurance  in  all  its  branches,  although 
in  proportion  to  population  the  amount  of  business  transacted 
and  the  corresponding  liability  incurred  is  probably  greater 
in   England  than  in  the  United  States. 

REFERENCES. 

1.  First  Report  of  the  Select  Committee  on  Joint  Stock  Companies. 

Report  of  the  House  of  Commons,  London,  March  15,  1844. 

2.  Report   from    the    Select    Committee    on    Assurance    Associations. 

Report  of  the  House  of  Commons,  London,  August  16,  1853. 

331 


ENGLISH   ASSURANCE    COMPANIES   ACT    OF    1909 

3.  Treatise  on  the  Banking  and  Insurance  Business  of  England,  by 

Carl  Schwebemeyer,  Berlin,  1857. 

4.  Report   from   the    Select   Committee   on   Limited    Liability   Acts. 

Report  of  the  House  of  Commons,  London,  May  28,  1867. 

5.  Article  on  the  Origin  of  Government  Insurance  in   England.     In- 

surance Monitor,  1869,  P-  9^^- 

6.  Article   on    Origin   of    Government    Insurance    in    England.      The 

Spectator,  issues  of  January  and  October,  1870. 

7.  Report  of  the  Select  Committee  on  the  Companies  Acts  of  1862- 

1867.    Report  of  the  House  of  Commons,  London,  July  26,  1877. 

8.  State  Supervision  of  Insurance  in  England,  by  Emory  McClintock, 

American  Life  Assurance  Magazine,  Vol.  XIV,  1878. 

9.  On  the  5th  and  6th  Schedules  of  the  Life  Assurance  Companies' 

Act  of  1870.     By  David  Deuchar,  F.  I.  A.,  Edinburgh,  1879. 

10.  Opinion  of  George  F.  King,  F.  I.  A.,  on  The  Principles  which  Should 

be  the  Guiding  Ones  in  Life  Insurance  Legislation.     London, 
September,  1906. 

11.  Report  of  the  House  of  Lords'  Committee  on  Life  Insurance  Com- 

panies (194),  London,  1906. 

12.  Insurance  Legislation,  British,  American  and  Canadian,  by  Thos. 

B.  Macaulay.     Toronto,  August  27,  1907. 

13.  Notes  on  the  Companies  Acts  of  1907,  by  Evans  and  Cooper.    Lon- 

don, 1907,  5th  edition. 

14.  British   Insurance   Methods  and   Government   Regulation.      Spec- 

tator (v.  d.),  1908  and  1909. 

15.  Supervision  of  Insurance   Companies  from   the   Actuarial   Stand- 

point.    By  Arthur  R.   Barrand,   F.   I.   A.     Proceedings  Inter- 
national Actuarial  Congress,  1909. 

16.  Parliamentary  Debates  on  the  Assurance  Companies  Act  of  1909. 

House  of  Lords,  1909,  Vol.  2,  Nos.  38,  57,  59;  House  of  Commons, 
1909,  Vol.  12,  No.  172,  Vol.  13,  Nos.  175,  176. 

17.  Statutory  Rules  and  Orders,   1910.     No     566.     Insurance. 

18.  The   Assurance    Companies    Act,     1909,    with    Notes   by    Maurice 

Hawtrey  Truelove,  London,  19 10, 

19.  The  new  law  regulating  Assurance  Companies,  Being  the  Act  of 

1909,  with  Notes  by  Fitzgerald  and  Quin,  London,  19 10. 


332 


CHAPTER  IX. 
THE  LAW  OF  AVERAGE  * 

There  is  a  great  fascination  about  numbers,  which  seems  to 
defy  the  understanding.  Figures  positively  affirm  or  deny  every 
conception  and  condition,  leaving  little,  if  any,  room  for  specu- 
lation or  uncertainty.  Vast  aggregations  expressed  in  figures 
appeal  powerfully  to  the  human  imagination  and  rates,  or 
ratios,  in  common  use  aid  the  understanding  and  direct  the 
judgment,  although  often  erroneous  or  misleading.  On  few  sub- 
jects is  there  so  little  real  general  knowledge  as  on  the  science 
of  numbers  and  yet  its  utility  it  so  enormous  that  the  world's 
work  could  not  be  carried  on  without  it.  The  uncritical  or 
unreasoning  use  of  figures,  however,  is  in  truth  a  very  serious 
menace  to  social  and  individual  well-being,  and  few  educational 
reforms  are  of  more  pressing  importance  than  a  better  under- 
standing of  the  nature  of  numbers,  their  philosophy,  their  value, 
and  their  limitations. 

Lord  Bacon  comprehended  a  vast  amount  of  sound  reason- 
ing in  the  prediction  that  men's  power  over  nature  would  be 
increased  a  thousand-fold  were  they  to  interpret  her  with  the 
humility    of    truth-seekers,    casting    aside    all    prepossessions. 

*  This  discussion  is  not  intended  as  a  scientific  outline  of  the  mathe- 
matical, or  even  the  statistical,  theory  of  average.  The  object  is  to 
emphasize  the  importance  of  general  statistical  results  as  a  basis  for 
general  conduct  in  the  everyday  affairs  of  life.  Those  who  are  interested 
in  the  more  scientific  aspects  of  the  theory  and  utility  of  averages  and 
means,  should  consult  the  treatise  on  Insurance  by  T.  E.  Young,  the 
Primer  of  Statistics  by  W.  P.  and  E.  M.  Elderton,  Statistical  Methods 
by  C.  B.  Davenport,  Theory  of  Mental  and  Social  Measurements  by 
Edward  L.  Thomdike,  Elements  of  Statistics  and  An  Elementary  Manual 
of  Statistics,  by  Arthur  L.  Bowley. 

333 


THE    LAW    OF   AVERAGE 

Facts,  in  other  words,  require  to  be  substituted  for  miscon- 
ceived theories  arising  out  of  prejudice,  bias,  or  desire,  and 
facts  in  the  aggregate  are  represented  by  the  science  of  numbers, 
In  proportion  as  a  basis  of  fact  replaces  guesswork  opinion, 
certainty  is  substituted  for  uncertainty,  and  past  experience 
permits  of  at  least  an  approximately  accurate  forecast  of  the 
future.  The  appreciation  of  facts,  their  value,  sequence,  and 
relative  significance,  forms  the  scientific  temperament  and  the 
function  of  science.  The  logical  sequence  of  a  given  group 
of  facts  is  the  law,  in  the  sense  in  which  we  speak  of  the  laws 
of  nature  in  contradistinction  to  the  laws  of  men.  Natural 
laws,  rightly  understood,  are  the  only  trustworthy  guides  for 
the  human  understanding,  for  they  permit  the  forecasting  of 
future  events,  and  such  forecasts  are,  of  necessity,  a  most  im- 
portant function  in  the  deliberate  life. 

The  Value  of  Past  Experience. 

For  we  must,  of  necessity,  assume  that  the  future,  to  a 
considerable  degree  and  extent,  will  resemble  at  least  the 
immediate  past,  since  otherwise  all  human  effort  would  be 
nugatory  and  chaos  would  result.  It  is  also  in  the  nature  of 
things,  or  a  natural  law,  that  the  underlying  causes  are,  as  a 
rule,  outside  of  our  understanding,  but  the  larger  the  basis  of 
past  experience,  the  more  Hkely  it  is  that,  conclusions  based 
upon  such  experience  will  be  accurate.  This  law  of  nature  is 
otherwise  expressed  as  the  law  of  large  numbers,  which,  often 
provides  a  basis  for  predicting  with  approximate  accuracy  the 
probable  occurrence  of  future  events  within  the  normal  range 
of  human  knowledge  and  experience.  No  one,  without  a  knowl- 
edge of  the  facts  of  past  experience,  can  forecast  the  future 
state  of  trade,  the  growth  of  cities,  the  productive  activity,  or 
any  other  of  the  thousand  and  one  problems  which  confront  us 
in  our  daily  life. 

We  use  the  term  "probabiHty"  in  a  general  way  to  express 
that  which  is  reasonably  certain  to  occur,  and  the  natural  law 
upon  which  this  assumption  rests  is  the  law  of  probability. 

334 


THE    LAW    OF    AVERAGE 

The  underlying  basis  of  the  law  of  probability,  is,  however,  the 
law  of  average,  which  itself  depends  upon  the  law  of  large  num- 
bers. An  average,  as  such,  is  simply  an  arithmetical  conception, 
which  in  every-day  use  is  often  erroneously  derived  from  numbers 
too  small  for  a  correct  result.  The  use  of  the  term  average 
is  also  applied  indiscriminately  in  many  cases  as  a  matter  of 
pure  assumption,  in  contrast  to  the  scientific  method  of  deter- 
mining the  average  by  calculation  from  a  large  number  of 
units  assembled  into  an  aggregate.  The  use  of  the  average 
in  this  sense  has  a  very  wide  application  in  connection  with 
the  solution  of  a  vast  number  of  social  and  individual  problems, 
since  it  serves  as  a  standard  or  guide  in  the  forming  of  our  judg- 
ment, which  must  needs  be  applied  impartially,  be  the  result 
what  it  may. 

The  Meaning  of  **  Average." 

In  the  common  use  of  the  word  average,  we  speak  of  an 
average  weight,  an  average  crop,  an  average  height,  an  average 
summer,  and  finally,  of  the  average  man  or  the  average  life. 
Many  of  these  expressions  are  extremely  vague  and  but  imper- 
fectly understood,  and  it  would  be  extremely  quite  for  most 
men  to  clearly  define  what  is  meant  by  an  average  in  the  popular 
sense  of  the  word.  Clearly  the  value  of  the  term  depends  upon 
the  nature  and  numerical  extent  of  the  units  from  which  it  is 
derived.  When  based  upon  a  few  cases,  which  may  individually 
vary  widely,  the  resulting  average  may  be  decidedly  erroneous. 
The  personal  idea  of  an  average  summer,  or  an  average  winter, 
may,  for  illustration,  rest  solely  upon  a  mere  matter  of  personal 
experience,  and  not  upon  carefully  collected  and  critically 
analyzed  meteorological  observations  extending  over  a  long 
period  of  years.  The  expression  "average  man"may  rest  upon 
complete  ignorance  as  to  the  most  important  anthropometric 
proportions,  or  the  aggregate  results  of  a  sufficient  number 
of  individual  lives,  carefully  observed  for  a  period  of  years. 
The  term  "average  life  time"  is  often  assumed  to  mean  the 
individual  expectation,  or  the  number  of  years  which  a  person 
may  expect  to  live  subsequent  to  a  given  year  which  has  been 

335 


THE   LAW   OF   AVERAGE 

attained,  while  in  fact  the  expression  means  the  equal  chance 
of  a  person  to  live  or  not  to  live  a  given  period  of  years,  which 
is,  of  course,  a  very  different  matter. 

More  accurate  is  the  use  of  the  average  in  mechanical 
employments,  when  an  engineer  speaks  of  the  average  pressure 
per  square  inch,  or  the  average  work  which  can  be  done  by  an 
engine  per  unit,  or  when  the  railroad  engineer  speaks  of  the 
average  speed  of  a  train,  or  the  average  load  per  car.  These 
are  all  measurable  quantities,  readily  within  the  understanding 
of  the  man  who  makes  use  of  the  term.  Still  more  clear  to  the 
human  mind  is  the  use  of  the  term  in  connection  with  matters 
of  business  and  finance,  when  we  speak  of  the  average  rate  of 
interest  earned  by  investments,  or  the  average  profit  realized 
in  bargains  or  sales,  or  the  average  rate  of  loss  which  must  be 
assumed  as  an  inherent  condition  of  every  legitimate  business 
venture. 

The  Proper  Use  of  **  Average." 

The  most  erroneous  use  of  the  average  is  when  the  term  is 
employed  to  forecast  individual  occurrences,  or  to  verify  indi- 
vidual predictions  of  individual  events,  which,  if  realized  at 
all  under  such  conditions,  would  be  a  mere  matter  of  true  acci- 
dent, or  pure  chance.  It  is,  in  fact,  the  very  opposite  of  the 
function  of  the  average  to  forecast  any  particular  event,  or  the 
occurrence  of  any  particular  contingency.  The  proper  use  of  the 
term  is  limited  to  the  forecasting  of  normal  events,  in  the  order 
of  normal  frequency.  While ,  for  illustration,  it  is  not  at  all 
difficult  to  forecast  with  reasonable  accuracy  the  population  of 
a  country  as  a  whole  for  a  subsequent  decade,  or  even  much 
longer,  provided  no  substantial  change  takes  place  in  the  essen- 
tial circumstances  which  condition  its  Hfe  and  growth,  it  is 
quite  difficult  to  forecast,  with  even  approximate  accuracy, 
the  growth  of  any  particular  community  with  a  small  population, 
or  say  less  than  twenty  thousand.  When  cities  or  towns  are  of 
very  considerable  size,  however,  such  as  New  York  or  Philadel- 
phia, a  forecast  may  be  made  of  the  population  a  decade  hence, 
which  in  all  probabiHty  will   be  closely  verified  by  the  actual 

336 


THE    LAW    OF    AVERAGE 

enumeration.  The  theory,  of  course,  is  based  upon  the  average 
rate  of  increase  during  a  previous  period  of  sufficient  length,  say 
a  decade,  or  quarter  century,  and  it  rests  upon  the  assumption 
that  the  normal  conditions  as  then  prevailing  and  governing 
the  rate  of  increase  by  an  excess  of  births  over  deaths,  and 
an  excess  of  immigration  over  emigration,  will  continue  as  in 
the  past.  When  important  changes  occur,  the  prediction, 
of  course,  comes  to  naught,  but  in  large  aggregates  the  changes 
would  have  to  be  very  powerful  indeed,  or  equivalent  to  a  catas- 
trophe or  revolution,  to  produce  a  very  substantial  deviation 
from  the  rate  of  growth  in  former  years.  Even  an  earthquake 
such  as  affected  the  city  of  San  Francisco,  may  not  materially 
change  the  existing  numbers  of  the  population  after  a  sufficient 
period  of  time  has  elapsed  for  a  re-assembling  of  the  former 
units  and  a  return  to  normal  conditions  of  life  and  growth. 

In  trade  it  is  practically  the  same,  and  given  a  knowledge 
such  as  we  have,  say  of  the  total  amount  of  foreign  imports 
during  a  period  of  years,  it  is  with  practical  certainty  that  we 
can  forecast,  within  reasonable  limitations,  the  approximate 
amount  of  goods  to  be  imported  during  a  subsequent  period  of 
years.  While  this  is  true  for  trade  in  the  aggregate,  it  would 
be  very  hazardous,  however,  to  forecast  the  probable  amount  of 
imports  of  any  given  article,  since  groups  of  the  units  composing 
the  aggregate  are  liable  to  a  much  greater  rate  of  fluctuation 
than  all  of  the  units  combined.  Here  again  it  is  assumed,  of 
necessity,  that  conditions  governing  the  import  trade  will  con- 
tinue uninterruptedly  in  the  future  as  they  have  in  the  past, 
since,  for  illustration,  a  radical  change  in  the  tariff,  or  even  a 
seriously  threatened  changein  the  rates  of  duty  upon  the  differ- 
ent articles,  or  goods,  would  tend  to  disturb,  and  possibly  set 
at  naught,  all  predictions,  however  conservatively  arrived  at. 

Forecasting  the  Future. 
Equally  imported  is  the  use  of  the  average  in  forecasting  the 
future  number  of  foreign  immigrants,  which  may  be  estimated 
with  reasonable  accuracy  upon  the  basis  of  recent  returns,  with  a 

337 


THE    LAW    OF   AVERAGE 

due  consideration  of  the  fluctuations  in  the  rate,  as  observed 
in  the  past.  Manifestly  a  fundamental  distinction  requires  to 
be  made  between  averages  derived  from  gradually  increasing 
aggregates,  resulting  from  an  increasing  population  on  the  one 
hand  and  an  increasing  productive  national  power  on  the  other, 
and  aggregates  which  conform  to  the  rhythm  of  motion  as 
ascending  and  descending  curves,  of  which  the  rate  of  immi- 
gration is  a  very  useful  illustration.  It  is  evident  that  great 
care  is  required  in  the  use  of  averages  derived  from  fluctuating 
aggregates  and  that  predictions  are  less  likely  to  conform  to 
subsequent  experience  unless  there  is  adequate  knowledge 
and  a  clear  understanding  of  all  the  facts  which  enter  into  the 
problem.  Predictions  as  to  the  future  number  of  immigrants 
depend,  of  course,  primarily  upon  the  assumption  that  there 
will  be  no  radical  change  in  existing  national  legislation,  or, 
in  other  words,  that  no  laws  will  be  passed  under  which  certain 
nationalities  are,  wholly,  or  in  part,  excluded  from  entry  at  our 
ports.  An  exclusion  law,  however,  which  would  only  affect  certain 
nationalities  which  do  not  contribute  numerically  to  any  con- 
siderable extent  to  our  present  immigration,  would  practically 
leave  predictions  unchanged. 

What  has  been  said  depends,  of  course,  upon  the  scientific 
assumption  that  **the  same  set  of  causes  is  always  accompanied 
by  the  same  effect,"  or  that  "the  future  will  be  Hke  our  expe- 
rience of  the  past,  which  is  the  sole  condition  under  which  we 
can  predict  what  is  about  to  happen,  and  so  guide  our  conduct." 
These  are  the  words  of  Karl  Pearson,  whose  Grammar  of  Science 
should  be  the  text-book  for  all  who  desire  to  replace  guesswork 
opinion  by  a  rational,  independent  and  impartial  method  of 
thinking.  For,  as  Pearson  has  well  said,  "in  the  struggle 
for  existence  man  has  won  his  dictatorship  over  other  forms 
of  life  by  his  power  of  foreseeing  the  events  which  flow  from 
antecedent  causes — not  only  by  his  memory  of  past  experience, 
but  by  his  power  of  codifying  natural  law,  that  is,  by  his  power 
of  generaUzing  experiences  in  scientific  statements."  It  is  in 
this  sense  that  we  speak  of  natural  laws  which  enable  us  to  know 

338 


THE    LAW    OF    AVERAGE 

how  phenomena  take  place,  but  do  not  explain  the  why  or 
wherefore.  With  these  the  man  of  science  has  no  concern,  since 
they  fall  within  the  domain  of  the  unknowable,  or  what  is  out- 
side the  scope  of  the  human  understanding.  Men's  minds  are 
great  or  small  in  proportion  as  they  possess  the  power  of  a  broad 
generalization,  by  which  they  are  enabled  to  arrive  at  a  comprehen- 
sive grasp  of  the  facts  of  past  experience,  upon  which  they  can  fore- 
cast with  approximate  accuracy  the  occurrence  of  future  events. 
The  law  of  the  individual  life  is  one  of  inherent  uncertainty, 
which  results  from  the  nature  of  things.  It  is  a  truism  that 
every  man  is  unlike  every  other,  and  this  is  equally  so  of  the 
success  which  is  attained  in  the  various  directions  in  which 
men  exercise  their  abilities.  If,  however,  all  the  units  are 
grouped,  there  is  a  degree  of  average  success  which  cannot  be 
defined  in  numbers,  but  which  is  fairly  well  comprehended 
without  them.  The  struggle  of  the  individual,  however,  is  rarely 
for  an  average  success  in  commerce,  industry,  science,  or  art, 
but  rather  for  exceptional  success,  or  a  decided  deviation  from 
the  preponderating  number  out  of  which  the  average  is 
derived. 

Practical  Uses  of  "  Averages." 

While  there  is  a  great  deal  of  uniformity  in  any  large  number 
of  events,  be  they  what  they  may,  whether  it  be  the  annual 
harvest  of  com  or  wheat,  the  number  of  railway  casualties  to 
passengers,  employees,  or  others,  the  number  of  letters  sent 
through  the  mails,  or  the  number  of  telegrams  sent  over  the 
wires,  the  variation  in  the  units  which  go  to  make  up  these 
masses  is  always  very  great,  and  the  degree  of  variation  is 
of  as  much  practical  importance  as  the  average  which  is  more 
conveniently  recalled  to  memory.  The  average  price  of  hay 
per  ton  throughout  the  United  States  during  1906  was  $10.37, 
but  the  average  price  for  the  state  of  Minnesota  was  as  low 
as  $5.50.  and  for  the  state  of  Rhode  Island  as  high  as  $17.40. 
.  Not  quite  as  great  was  the  variation  in  the  average  yield  of 
hay  per  acre,  which  was  1.35  tons  for  the  United  States,  but  as 
low  as  0.78   of   a  ton  in   Missouri,   and  as   high  as   4.0   tons 

339 


THE   LAW   OP   AVERAGE 

in  Utah.  For  both  of  these  items,  however,  the  averages 
would  vary  considerably  for  different  years,  and  while,  for 
illustration,  the  average  yield  of  hay  per  acre  in  Utah  was 
4.0  tons  in  1906,  it  was  as  low  as  2.45  tons  in  1901.  Evidently 
any  forecast  of  the  future  must  take  into  consideration  the 
fluctuation  in  averages  for  small  groups,  which  again  go  to 
make  up  the  averages  for  large  aggregates.  We  have  to  con- 
sider the  elements  of  time  and  place  the  moment  we  make 
a  more  narrow  application  of  the  law  of  average  to  forecast 
the  future  for  a  more  limited  range  of  conditions  or  events. 

For  illustration,  if  any  one  were  authorized  to  contract 
for  the  purchase  of  a  large  number  of  horses,  let  us  say  ten 
thousand,  to  supply  an  army,  or  meet  the  needs  of  a  large 
corporation,  it  would  be  reasonable  to  take  into  consideration 
the  average  price  for  the  United  States,  which  during  1906, 
was  $93.50.  Since,  however,  the  variation  in  the  average 
price  was  between  $41  in  Arizona  and  $126  in  South  Carolina, 
the  local  market  would  have  to  be  seriously  considered  to  make 
the  business  venture  a  success.  In  examining  the  data  of  the 
subject  it  will  be  found  that  the  largest  number  of  horses  was 
in  the  states  of  Illinois,  Iowa,  Kansas,  and  Texas,  where  the 
respective  average  prices  were  $109,  $100,  $89,  and  $62.  If, 
however,  the  place  where  the  horses  were  required  was  in  the 
east,  let  us  say  New  York,  the  local  market  price  of  $111  would 
probably  be  cheaper  than  the  more  remote  and  lower  prices, 
which  would  be  increased  by  the  cost  of  long  transportation.  Even 
then,  however,  the  average  derived  from  very  large  numbers, 
or  nearly  twenty  million  horses  throughout  the  country,  would 
be  fairly  applicable  to  the  problem  and  if  the  mode  of  greatest 
frequency  of  price  were  considered,  it  would  be  safe  to  contract 
to  supply  upon  the  estimated  basis  of  about  $100.  The  data, 
however,  would  be  much  more  determining  to  the  government, 
or  the  corporation,  than  to  the  contractor,  who  would  be  more 
free  to  make  his  choice  and  to  enter  into  individual  bargaining 
not  subject  to  the  law  of  average,  provided  the  number  of  units 
to  be  supplied  was  of  reasonable  proportion. 

340 


the  law  op  average 

The  Element  of  Chance. 

The  man  of  business,  in  other  words,  must  forecast  the 
needs  of  the  future  from  day  to  day  and  year  to  year,  even  if 
only  a  moderate  degree  of  success  is  to  result  from  his  efforts. 
There  is  no  reliance  to  be  placed  upon  luck  in  life,  or  chance, 
in  the  sense  as  the  terms  are  generally  used,  but  there  are 
exceptional  occurrences,  due  to  causes  which  are  outside  the 
operation  of  the  law  of  average.  Good  luck  and  ill  luck,  or 
the  '  equivalent  of  exceptional  success  or  exceptional  failure, 
are  inherent  in  the  nature  of  things  the  moment  the  few  are 
considered  which  form  the  decided  variations  from  the  average 
or  the  mode  which  is  a  more  scientific  and  better  representation 
of  the  greatest  frequency  of  normal  occurrences.  Those  whose 
conduct  is  influenced  by  exceptional  occurrences,  or  the  mere 
accidental  fulfillment  of  arbitrary  predictions,  overlook  a 
thousand  negative  results  by  conforming  their  conduct  to  the 
one  accidental  fulfillment  of  a  chance  prediction. 

The  inclination  to  rely  upon  chance  is  partly  in  conformity 
to  the  well-known  principle  that  negative  events  have  a  far  less 
firm  and  persistent  hold  upon  the  mind  than  positive  events, 
which  explains  the  still  persistent  belief  of  those  who  believe 
in  weather  folklore  and  in  local  weather  signs,  and  who  would 
connect  the  advent  of  the  seasons,  or  their  degree  of  severity, 
with  animals  and  birds,  insects  and  plants,  the  sun,  the  moon, 
and  the  stars.  It  will  usually  be  found  that  popular  weather 
interpretations,  or  forecasts,  are  easily  disproved  by  accurate 
observations  extending  over  a  period  of  years,  but  all  evidence 
of  this  character  notwithstanding,  those  who  will  not  see  and 
will  not  understand  persist  in  their  course  of  ill-reasoning  and 
guess-work  opinion.  Conduct  which  is  made  to  rest  upon 
such  a  basis  must  prove  disappointing  in  the  large  majority  of 
cases.  From  this  point  of  view  also  all  proverbial  philosophy 
is,  as  a  rule,  misleading,  and  more  certain  to  cause  disaster  than 
to  bring  success.  It  is  not  claimed  that  any  amount  of  accu- 
mulated experience  will  ever  enable  us  to  forecast  the  future 
with  absolute  accuracy  or  certainty,  but,  other  things  equal, 

341 


THE    LAW   OP   AVERAGE 

the  man  who  has  learned  to  conform  his  conduct  to  the  law 
of  average,  and  who  has  amplified  his  knowledge  by  a  study 
of  the  degree  of  normal  variation  and  frequency,  is  more  certain 
of  success  in  business  life  than  the  one  whose  conduct  is  made 
to  rest  upon  belief  in  luck  and  good  fortune  and  whose  plans 
change  with  the  weather  and  whose  purposes  change  with 
the  occurrence  of  events.  While  the  liability  to  error  in  judg- 
ment is  enormous  in  the  consideration  of  individual  instances 
or  events,  the  liability  is  reduced  to  a  minimum  when  judg- 
ment is  based  upon  the  law  of  average,  or  the  degree  of  greatest 
frequency,  as  determined  by  large  numbers,  which  eliminate 
the  fluctuations  due  to  accidental  causes. 

The  Law  of  Variation. 

Recalling  that  the  science  of  averages  is,  in  fact,  the  science 
of  large  numbers,  the  resulting  function  must  of  necessity 
represent  a  large  degree  of  variety  in  the  individual  units 
which  compose  it.  In  fact,  the  average  as  such,  may  not  ex- 
actly correspond  to  any  one  of  the  many  individual  units,  or 
groups,  from  which  it  has  been  derived.  Thus,  for  illustration, 
the  average  height  of  a  group  of  say,  one  thousand  men,  may 
be  five  feet,  eight  and  one-quarter  inches,  but  few  if  any  one 
of  the  many  may  be  exactly  of  the  degree  of  height  representing 
the  average.  A  few  of  the  men  in  the  group  may  be  as  small 
as  dwarfs,  while  a  few  at  the  other  extreme  may  be  of  the  height 
of  giants,  but  the  preponderating  majority  will  be  found  to  be 
of,  or  about,  the  height  centering  around  the  average  of  five 
feet,  eight  and  one-quarter  inches.  If  upon  this  exact  average  a 
tailor  were  to  furnish  clothing  for  a  group  of  men  by  suits  of 
the  average  dimensions,  including,  of  course,  other  factors 
which  need  not  here  be  considered,  the  results  would  conform 
to  the  needs  of  only  a  small  group  and  be  of  no  value  whatever 
to  a  considerable  proportion  who  would  deviate  too  decidedly 
from  the  average. 

In  other  words,  to  overlook  the  degree  of  variation  is  as 
much  an  error  as  to  base  judgment  exclusively  on  exceptional 

342 


THE    LAW   OF   AVERAGE 

cases.  To  arrive  at  an  accurate  result  a  tailor  must  con- 
sider the  degree  of  variation  in  different  groups  and  must  ascer- 
tain the  proportion  of  men  of  different  degrees  of  height,  which 
would  produce  a  result  almost  in  exact  conformity  to  the  needs 
of  the  group  under  consideration.  The  practical  application  of 
this  theory  we  meet  with  in  everyday  life,  in  any  store  which 
supplies  the  needs,  not  so  much  of  the  true  average  type 
of  man  as  of  the  preponderating  number  grouped  about  the 
average. 

The  reference  to  dwarfs  and  giants,  as  decided  variations 
from  the  height  of  men  in  the  mass,  will  serve  as  an  illustration 
of  exceptional  success  and  exceptional  failure  in  business  or 
private  life.  It  is  a  most  serious  error  on  the  part  of  the 
periodical  press  to  over-rate  the  value  of  exceptional  success 
and  to  hold  out  exceptional  types  as  ideals,  to  which  average 
conduct  should  conform.  It  is  utterly  out  of  the  question 
and  in  contradiction  to  the  law  of  probability,  that  more 
than  a  small  group  of  men  can  attain  exceptional  success,  riches, 
power,  or  fame,  for  a  large  group  are  sure  to  fall  below  and  prove 
decided  failures.  It  is  because  of  this  error  in  judgment  that 
so  large  a  number  of  men  over-rate  their  ability  and  their 
inherent  power  to  attain  to  a  degree  of  success  fBr  above 
the  normal  which  pertains  to  the  mass  of  mankind,  and 
that  the  proportion  of  complete  failures  is  so  large,  the  evi- 
dence of  which  we  find  in  the  increasing  number  of  suicides, 
criminals  and  insane.  A  rational  understanding  of  the  limi- 
tations under  which  human  life  in  the  mass  can  be  carried 
on,  is  one  of  the  most  certain  safe-guards  to  a  sane  and 
rational  existence.  In  the  nature  of  things  this  must  be  so, 
and  in  the  nature  of  things  it  can  never  be  otherwise,  all 
of  the  speculations  of  political  and  social  dreamers  to  the  con- 
trary notwithstanding.  No  more  will  there  ever  come  a  time 
when  all  men  will  be  of  the  same  height,  or  weight,  or  of  the 
same  degree  of  physical  strength,  than  there  will  ever  come 
a  time  when  they  will  be  of  the  same  degree  of  mental,  moral 
and  emotional  development.     There  will  always  be  a  mass  in 

343 


THE   LAW   OF   AVERAGE 

which  the  units  will  fairly  conform  to  one  another,  though  each 
will  be  more  or  less  slightly  different  from  any  of  the  rest,  while 
there  always  will  be  a  small  group  of  persons  of  exceptional 
ability  at  the  one  extreme,  and  a  greater  group  of  men  of 
exceptional  inability  at  the  other. 

The  Law  of  Large  Numbers. 

This  is  the  law  of  average,  the  law  of  large  numbers,  the 
law  of  nature,  which  governs  the  life  of  men,  and  things,  and 
events,  and  all  that  there  is  in  the  world,  and  all  that  there 
ever  will  be.  If  we  had  the  measurements  of  all  the  stars 
in  the  heavens  we  would  find  them  to  conform  to  the  law  of 
average,  grouping  in  dimensions  around  the  mode  of  greatest 
frequency,  with  a  curve  tapering  down  on  the  one  side  to  the 
smallest  dimensions,  and  on  the  other  ascending  to  the  largest. 
If  we  could  measure  every  animal,  every  plant,  every  leaf, 
even  down  to  the  size  of  every  grain  of  com,  we  would  find  the 
same  conformity  to  the  law  of  average,  and  the  law  of  greatest 
frequency,  and  the  law  of  variation,  as  we  find  it  in  the  life  of 
men.  But  for  this  salutary  state  of  things,  human  existence 
would  be  chaos  and  human  life,  as  we  understand  it,  would 
be  impossible.  But  for  the  law  of  average,  or  the  law  of  large 
numbers,  we  could  not  forecast  the  future  with  any  reasonable 
degree  of  accuracy,  and  without  such  a  forecast  all  our  efforts 
would  be  nugatory  and  all  our  aims  and  aspirations  would 
come  to  naught. 

Futility  of  Gambling  and  Speculation. 

In  clear  contrast  to  the  natural  law  of  average,  or  normal 
frequency  in  the  occurrence  of  events,  stands  the  theory  of 
pure  chance,  best  illustrated  in  gambling,  betting,  lotteries, 
and  stock  exchange  speculations.  This  difference  was  clearly 
perceived  among  the  Romans  who  distinguished  between  For- 
tuna  and  Fatum,  or  fortune  and  fate,  the  former  being  acts 
outside  of  established  laws,  or  occurrences  of  mere  caprice,  while 
the  latter  implies  predetermined  events   in  conformity   to  the 

344 


THE   LAW   OF   AVERAGE 

science  of  average.  It  would  be  unwise,  of  course,  to  ignore  the 
enormous  importance  of  matters  of  pure  chance  in  daily  life,  or, 
as  it  has  beautifully  been  expressed  in  the  words,  **0,  Lord,  on 
what  a  slender  thread  hang  everlasting  things!  "  The  thread 
of  the  individual  life  may  at  any  moment  be  broken  by  any  one 
of  a  thousand  chances,  which  are  lost  in  the  aggregate,  but  em- 
phasize the  true  course  of  nature,  "How  careful  of  the  type 
she  seems,  how  careless  of  the  single  life."  There,  however, 
is  no  premeditation,  or  fate,  in  occurrences  of  chance,  but  they 
result  from  the  nature  of  things,  which  it  is  the  object  of  human 
knowledge,  as  far  as  possible,  to  foresee  and  set  aside.  It  is 
the  better  part  of  wisdom  to  rely  upon  past  experience  and 
observed  events  establishing  the  law  of  frequency  and  recur- 
rence, than  to  trust  to  chance,  or  luck,  as  determining  factors 
in  the  affairs  of  life.  The  gambler  lives  in  opposition  to  this 
theory  of  a  rational  adaptation  to  things  as  they  are,  and  as 
they  ever  will  be,  if  civilization  is  to  endure  and  the  progress 
of  mankind  is  to  continue.  The  gambler  takes  his  chance 
with  a  practical  certainty  that  he  will  lose  his  all  in  a  desperate 
effort  to  gain  the  all  of  others,  and  he  arrives  at  his  conclusions 
by  an  ill-reasoned  hope  for  the  most  improbable  occurrence 
of  a  specific  event.  In  gambling  the  chance  of  loss  amounts 
to  practically  a  certainty,  partly  because  in  the  nature  of 
things,  the  bank,  or  house,  relies  on  the  science  of  averages, 
while  the  individual  gambler  relies  on  the  theory  of  probability, 
or  pure  chance.  This  is  true  of  stock  exchange  speculation, 
in  which  millions  are  sunk  by  the  many  in  the  vain  endeavor 
to  secure  large  gains  from  the  few  who  operate  in  conformity 
to  the  science  of  average  and  in  opposition  to  the  principle  of 
pure  chance  which  governs  the  individual  speculator  or  in- 
vestor. In  other  words,  certainty  of  results  is  enormously 
in  favor  of  those  who  practically  take  no  chance  whatever, 
while  the  risk  of  loss  is  out  of  all  proportion  to  the  probability 
of  gain  on  the  part  of  those  who  rely  upon  an  accidental  occur- 
rence which  may  bring  them  exceptional  results. 

345 


the  law  of  average 

Theory  of  Probability. 

The  theory  of  probability  has  its  scientific  explanation 
and  use,  but  it  has  no  practical  value  to  the  individual  in  his 
efforts  to  forecast  with  certainty  the  occurrence  of  a  specific 
event.  The  theory  of  probability  lies  at  the  root  of  the  vast 
business  of  insurance  in  all  its  branches,  and  being  derived 
from  the  science  of  average  it  meets  the  conditions  of  this 
business  in  the  most  admirable  manner  by  equalizing  losses  and 
effecting  a  re-distribution  of  results.  While  it  is  impossible  to 
forecast  the  probable  duration  of  a  single  life,  it  is  not  at  all 
difficult  to  predict  with  approximate  certainty  the  average 
duration  of  a  sufficient  number  of  lives.  Accuracy  in  the  veri- 
fication of  scientific  prediction  increases  with  increasing  numbers, 
so  that,  other  things  equal,  the  security  is  greatest  where  the 
number  of  tmits  is  largest.  The  more  extensive  the  field  of 
operations,  the  more  certain  it  is  that  accidental  variations 
from  the  normal  will  balance  themselves,  and  that  the  general 
result  will  conform  to  the  expected  or  predicted  outcome.  As 
civilization  advances,  however,  and  with  the  progress  of  sanitary 
and  medical  science,  the  tendency  of  the  human  death  rate  will 
be  to  decline  and  of  longevity  to  increase,  so  that  an  ever  larger 
proportion  of  those  who  are  born  may  live  to  the  highest  attain- 
able ages,  from  the  biblical  three  score  and  ten  to  a  possible 
maximum  beyond  the  century  mark. 

Law  of  Average  Applied  to  Problems  of  Mortality. 

Largely  because  of  an  increasing  familiarity  with  the  law 
of  average,  as  applied  to  problems  of  human  mortality,  modem 
science  has  been  able  to  determine  the  underlying  conditions 
destructive  to  health  and  life,  which  by  degrees  have  been 
removed  or  mitigated  until  very  substantial  fluctuations  in 
the  death  rate  are  becoming  less  and  less  frequent.  It  is 
to-day  extremely  improbable  that  there  will  ever  again  occur 
cholera  epidemics  such  as  brought  desolation  and  sorrow  to 
tens  of  thousands  of  homes  in  1849,  or  yellow  fever  epidemics 
such  as  brought  ruin  and  disaster  to  the  south  in  1878.     Occur- 

346 


THE    LAW    OF    AVERAGE 

fences  like  these  raised  the  death  rate  of  New  York  to  46.7 
per  thousand,  and  of  New  Orleans  to  48.9  per  thousand,  during 
the  years  mentioned,  a  deviation  from  the  normal  which  has 
not  been  experienced  since.  A  knowledge  of  the  facts  in  question 
was  first  necessary  before  remedial  measures  could  be  taken  and 
the  lessons  of  life  insurance  experience  and  sanitary  science, 
more,  perhaps,  than  any  other  facts  of  human  experience,  em- 
phasize the  enormous  value  of  a  scientific  study  of  the  past 
and  the  rigid  enforcement  of  rules  of  social  conduct  based  upon 
past  experience. 

American  mortality  experience  during  recent  years  also  em- 
phasizes the  truth  of  this  conclusion.  While  the  average  mortality 
from  all  causes  in  the  registration  area  was  16.3  per  thousand 
during  the  five  years  ending  with  1907,  it  was  15.4  per  thousand 
during  1908.  The  lowest  death  rate  during  the  period  of  six 
years  was  15.4  per  thousand,  and  the  highest  16.7,  which  con- 
forms closely  to  the  average  during  the  five  years  ending  with 
1907,  and  also  to  the  rate  prevailing  during  1904  and  1908.  A 
similar  degree  of  regularity  is  to  be  observed  in  the  mortality 
records  of  other  countries  with  conditions  similar  to  those  met 
with  in  the  United  States.  If  the  death  rate  is  somewhat  higher 
the  degree  of  fluctuation  is  somewhat  greater,  and  the  degree 
of  variation  will  probably  be  reduced  as  the  rate  is  lowered 
by  slow  degrees  as  the  result  of  sanitary  and  social  progress. 

What  is  true  of  the  mortality  from  all  causes  is  equally 
true  of  the  mortality  from  principal  causes,  except  diseases  of 
an  acute  or  infectious  character,  such  as  smallpox,  la  grippe, 
diphtheria,  measles,  etc.  It  is  possible,  upon  the  basis  of  large 
numbers,  or  the  science  of  average,  to  predict  with  approx- 
imate certainty  the  proportion  of  male  births  to  female 
births,  which,  for  Massachusetts,  for  illustration,  is  in  the  ratio 
of  105  males  to  every  100  of  females.  It  is  possible  to  pre- 
dict that,  other  things  equal,  the  mortality  of  females  will 
be  below  the  mortality  of  males  at  all  ages,  and  that  a  larger 
number  of  women  will  survive  to  old  age  than  of  men.  It  is 
possible  to  predict  that  the  proportion  of  deaths  from  con- 

347 


THE    LAW    OF    AVERAGE 

sumption  will  be  approximately  9.6  per  cent,  of  the  mortality 
from  all  causes,  while  the  proportion  of  deaths  from  diseases 
of  the  heart  will  be  10.5  per  cent.,  and  of  diseases  of  the  nervous 
system  10.2  per  cent.  It  is  possible  to  predict  that  the  rate 
at  which  suicides  will  occur  among  the  population  of  large 
cities  will  be  approximately  two  per  ten  thousand  of  popu- 
lation, and  that  in  sixty-five  of  our  large  American  cities  during 
the  present  year  approximately  3,000  suicides  will  occur.  It 
is  possible  to  forecast  the  number  of  coal  mining  accidents, 
which  amount  to  about  2,400  per  annum  and  occur  at  the  rate 
of  3.4  per  thousand  of  men  employed  in  coal  mining  opera- 
tions. It  is  possible  to  forecast  the  number  of  railway  casu- 
alties to  employees,  which  during  19 10  will  probably  number 
4,000,  or  occur  at  the  rate  of  2.5  per  thousand  of  men  employed. 
These  illustrations  could  be  multiplied  and  made  to  include 
practically  every  condition  affecting  the  happiness  and  welfare 
of  mankind,  and  in  proportion  as  the  value  and  significance 
of  collective  phenomena  is  duly  appreciated,  and  as  the  lessons 
derived  from  the  science  of  average  are  applied  to  the  solution 
of  social  problems,  will  the  social  progress  of  mankind  be  rapid, 
or  the  reverse. 

The  Inductive  Method  op  Reasoning. 

"Man,"  said  Lord  Bacon,  "being  the  servant  and  inter- 
preter of  nature,  can  do  and  understand  so  much,  and  so  much 
only  as  he  has  observed  in  fact,  or  in  thought,  of  the  course 
of  nature:  beyond  this  he  neither  knows  anything,  nor  can  do 
anything."  Evidently  the  course  towards  a  right  understanding 
of  nature  is  to  comprehend  as  clearly  and  vividly  as  possible 
the  lesson  taught  by  collective  phenomena,  rather  than  by  ex- 
ceptional occurrences,  or  exceptional  results.  It  is  better  for 
the  average  man,  or  more  accurately,  the  mass  of  mankind, 
to  conform  their  conduct  to  the  teachings  of  past  experience, 
and  thus  forecast  with  approximate  accuracy  the  future,  than 
to  place  any  considerable  degree  of  hope  or  reliance  upon  pure 
chance,  which  is  practically  certain  to  bring  disappointment, 

348 


THE    LAW    OF    AVERAGE 

disaster  and  ruin.  I  once  more  may  quote  Lord  Bacon's  words 
that  "Such  is  the  way  of  all  superstition,  whether  in  astrology, 
dreams,  omens,  divine  judgments,  or  the  like;  wherein  men 
having  to  deal  in  such  vanities  mark  the  events  when  they 
are  fulfilled,  but  where  they  fail,  although  this  happens  much 
oftener,  neglect  and  pass  them  by."  Instead  of  being  led  by 
chance  occurrences,  the  intelligent  man  should  dispassionately 
consider  the  facts  and  circumstances  and  realize  that  the  prob- 
ability of  a  recurrence  of  exceptional  events,  or  luck,  or  good 
fortune,  is  not  at  all  likely  to  take  place.  In  other  words,  it 
is  our  duty  to  make  every  effort  to  grasp  clearly  and  vividly 
the  facts  of  human  experience,  and  apply,  as  far  as  prac- 
ticable, the  lessons  of  such  experience  to  our  own  conduct  and 
towards  the  solution  of  such  problems  as  we  may  be  called 
upon  to  consider.  Only  that  can  really  be  called  an  edu- 
cation which  leads  to  a  discipline  of  the  mind  and  real  mental 
exertion,  to  bring  out  the  best  that  is  in  us,  in  place  of  a 
mediocre  result  far  below  the  attainable  average.  Our  judg- 
ment requires  to  be  made  to  conform  to  observed  experience 
in  place  of  guesswork  opinion,  with  a  distinct  inclination  towards 
inquiry  and  mature  reflection,  in  place  of  hasty  and  arbitrary 
action,  which  is  merely  a  matter  of  caprice.  When  this  rule  of 
conduct  is  observed,  we  shall  hear  less  of  games  of  chance,  of 
manias  and  speculations,  for  the  inherent  absurdity  of  reliance 
upon  the  most  improbable  of  events,  or  combination  of  events, 
will  be  made  clear  to  us.  We  shall  no  longer  stultify  our  in- 
telligence by  the  notion  that  a  mania  for  gambling  and  spec- 
ulation, or  a  betting  upon  uncertainties,  is  a  trait  inherent  in 
the  nature  of  men,  and  perhaps  a  commendable  pastime,  but 
we  shall  understand  that  such  conceptions  of  conduct  result 
from  ignorance  of  natural  laws  which  govern  human  life  and 
human  actions  in  the  mass  the  same  as  the  movements  of  the 
most  distant  stars.  In  brief,  we  shall  find  it  more  safe  to  rely 
upon  the  law  of  average,  as  expressed  in  results  of  past  expe- 
rience, or  the  inherent  order  and  degree  of  frequency  of  things 
and  events,   and  by  doing  so  increase  our  personal  security 

349 


THE    LAW   OP   AVERAGE 

against  disaster  on  the  one  hand,  and  our  peace,  happiness,  and 
prosperity  on  the  other.  The  more  perfect  our  knowledge  in 
this  respect,  the  more  certain  that  our  course  in  Hfe,  though 
perhaps  less  eventful  and  adventurous,  will  be  more  productive 
of  good  results  to  ourselves  and  to  others,  while  throughout 
social  and  commercial  life  there  will  be  increased  stability, 
which,  other  things  equal,  furnishes  the  largest  degree  of  happi- 
ness and  well-being  to  the  largest  number. 

LIST  OF  REFERENCES. 

1.     De  Morgan,  Augustus;  Essay  on  Probabilities,  London,  1838. 
a.     Quetelet,  M.  A.;  Popular  Instruction  on  the  Calculation  of  Prob- 
abilities, London,  1849. 

3.  Clark,  Saml.;  The  Laws  of  Chance,  London,  1843. 

4.  Rouse,  Wm.;  The  Doctrine  of  Chances  or  the  Theory  of  Gaming, 

London,  n,  d. 

5.  Emery,  Henry  C;  Speculation  on  the  Stock  and  Produce  Exchanges 

of  the  U.  S.,  New  York,  1896. 

6.  Reflections  upon  what  the  world  commonly  calls  Good  Luck  and 

111  Luck  with  regard  to  Lotteries,  2nd  Ed.,  London,  n.  d. 

7.  The  Gambling  World;  Anon.,  N.  Y.,  1898. 

8.  Ashton,  John;  The  History  of  Gambling  in  England,  London  and 

N.  Y.,  1889. 

9.  Green,  J.  H.;  Exposition  of  the  Arts  and  Mysteries  of  Gambling, 

Phila.,  1848. 

10.  Jevons,  Stanley;  Principles  of  Science,  2  vols.,  London,  1871. 

11.  Gryzanovski,   E.   C.   F.;   On   Collective   Phenomena,   pub.  by  the 

American  Economic  Association,  1906. 

12.  History,  Theory  and  Technique  of  Statistics,  by  August  Meitzen; 

translated  by  Roland  P.  Faulkner,  Phila.,  1891. 

13.  Galton,   Francis;  Inquiry  into   Human   Faculty  and  its  Develop- 

ir^ent,  2nd  Ed.,  Everyman's  Library,  n.  d.,  p.  194. 


3SO 


LIST  OF  AUTHORS 


Ames,  James  B.,  149,  150 
Ashburner,  Walter.  95,  96. 

Bacon,  Francis,  45,  333,  348. 

Bagehot,  Walter,  36. 

Barbon,  Dr.,  155. 

Beawes,  Wyndham,  107. 

Beckmann,  John,  98,  113. 

Benedict,  Erastus  C,  149. 

Benjamin,  R.  M.,  140, 

Blackstone,  Sir  William,  144,  152,  153. 

Blodget,  Lorin,  17. 

Blunt,  Joseph,  108. 

Blydenburgh,  Jeremiah  W.,  94,  144. 

Bowley,  Arthur  L.,  333. 

Bradley,  Joseph  P.,  149. 

Brodie,  Alexander,  125. 

Bryce,  James,  265. 

Bunyon,  Charles  J.,  163. 

Caines,  George,  151,  190. 
Carey,  John,  105. 
Cartwright,  C.  W.,  198. 
Cassel,  G.,  292. 
Churchill,  Winston,  330. 
Clark,  John  B.,  44. 
Clarke,  Francis  G.,  108. 
Cleveland.  F.  A.,  308. 
Cleveland,  Grover.  292. 
Colbert,  Jean  Baptiste,  12a. 
Compte,  Auguste,  45. 
Cooley,  Thomas  M.,  291. 
Copson,  John.,  159 
Cox,  Robert  Lynn,  289. 
Creighton,  Charles,  15. 
Crouse,  Benjamin  F.,  300. 
Cunningham,  Thomas,  113. 
Currie,  Gilbert.  40,  41. 

Dana.  R.  H.,  167. 

Darby,  William,  21. 

Da  vies,  William  G.,  29. 

Davenport,  C.  B.,  333. 

Davis.  John  P.,  200. 

Deane,  Silas,  128. 

Demosthenes.  95. 

Drake,  Daniel,  16,  17. 

Dryden,  John  F.,  14,  42,  45,  179,  202,  209, 

211,  213,  214,  264,  288,  300,  307. 
Duckworth,  Lawrence,  97. 


Duer,  John,  102,  121. 
Duffield,  Edward  D.,  273. 
Dunglison,  Robley,  17. 
Dymond,  Jonathan,  8. 

Elderton,  Ethel  M.,  333. 
Ehrenbei^,  Dr.  Victor,  239. 
Ely,  Richard  T.,  78. 
Emminghaus,  Dr.  Arwed,  239. 

Fenner,  E.  D.,  18. 

Fetter,  Frank  A.,  73. 

Finch,  John  A.,  306. 

Fisher,  Irving,  51,  80. 

Flanders,  Henry,  92,  150. 

Ford,  Worthington  C,  177. 

Fowler,   John  A.,  144,  157,    162,  166,  178 

Franklin,  Benjamin,  170. 

Gordon,  William,  176. 
Gotild,  B.  A.,  10,  21. 
Gow,  William,  150. 
Graham,  Wm.  J.,  309,  310. 
Griggs,  John  W..  27. 
Gruner.  Ernst,  228. 
Guthrie,  William,  21. 

Hadley,  Arthur  T.,  70. 
Hahn,  Dr.  Ferdinand,  230. 
Hall,  John  E.,  95. 
Hamilton,  Alexander.  132,  211. 
Hamilton,  James,  170. 
Hamilton.  Robert,  124. 
Hardie.  Keir.  330. 
Hardy,  E.  R..  98,  121,  175,  189. 
Haviland,  Alfred,  21. 
Hepbtim,  A.  Barton,  38. 
Hine,  C,  C,  27. 
Hobson,  J.  A.,  SI,  84. 
Hoffman,  Frederick  L.,  18. 
Holmes,  Jr.,  Oliver  W.,  215. 
Holt,  Henry,  83. 
Huet,  Bishop,  122. 
Hughes,  Charles,  265. 

Johnston.  H.  H.,  22. 

Karup.  Johannes,  339. 

Kent.  James.  132,  192,  193,  194,  203,  204, 

205. 


351 


LIST  OF   AUTHORS 


King,  George,  la. 
Knapp,  J.  L.,  3o6. 

Lee,  Arthur,  128. 
Lewis,  Joseph  J.,  278. 
Lewis,  Governor  Morgan,  19a. 
Lindabury,  Richard  V.,  179,  aio,  273. 
Logan,  James,  158. 

Macdonald,  William,  174. 
Mackay,  Charles  20. 
Macleod,  Henry  D.,  5,  32,  68. 
Macmillan,  Michael,  61. 
Magens,  Nicholas,  109. 
Malynes,  Gerard,  too. 
Mansfield,  Lord,  112,  113,  117,  164 
Marion,  Joseph,  169,  170. 
Marshall,  John,  209. 
Marshall,  Samuel,  25,  64,  93. 
Martifi,  Frederick,  144,  148. 
Mayo-Smith,  Richmond,  280. 
McCulloch,  J.  R.,  34,  271. 
Mill,  John  Stuart,  41,  56,  272. 
Millar,  John,  84,  123,  154,  163. 
MoUoy,  Charles,  97. 
Moore,  John  B.,  129. 
Moore,  John  H.,  108. 
Morrell,  Edward,  209. 
Morris,  Corbyn,  106,  107. 

Newsholme,  Arthur,  12. 

Park,  James  Allan,  25,  98,   119,   121,  122, 

123. 
Patten,  John,  208. 
Pearson,  Karl,  11,  338. 
Peel,  Robert,  283. 
Penn,  William,  158. 
Peto,  S.  Morton,  272. 
Phillips,  Willard,  203. 
Pickering,  Charles,  21, 
Pitt,  William,  271,  283. 
Plass,  Johann  Priedrich,  146. 
Piatt.  Thomas  C,  208. 
Pocock,  Lewis,  43. 
Postlethwayt,  Malachy,  110,  i6a. 
Price,  Richard,  44. 
Puflfendorf,  Baron,  103. 

Ouetelet,  Adolphe,  9,  ai,  350. 

Rawle.  Francis,  103,  159, 
Reatz,  146. 


Relton,  Francis  B.,  157,  158. 
Richards,  George,  145,  202. 
Ripley,  William  Z.,  24. 
Rogers,  Dr.  O.  H.,  10. 
Rolt,  Richard,  107. 
Roscher,  William,  7,  58,  59. 

Saunders,  Joseph,  160. 
Scattergood,  J.  Henry,  118. 
Schouler,  James,  170. 
Seligman,  Edwin  R.  A.,  74,  302. 
Seguin,  Dr.  Edward  C,  11. 
Shattuck,  Lemuel,  16. 
Shee,  Walter,  160. 
Smith,  Adam,  52. 
Smith,  John,  170. 
Smith,  Samuel  B.,  288. 
Smith,  Toulmin,  33, 
Smith,  William,  173. 
Spencer,  Herbert,  45,  216. 
Sumner,  Charles,  282. 
Sumner,  William  G.,  40. 

Thompson,  Robert  E.,  57, 
Thomdike,  Edward  L.,  333. 
Turner,  Sharon,  33. 

Vance,  William  R.,  99,  113. 

Walford,  Cornelius,  33,  91,  95,  97,  100,  102, 

156. 
Walker,  Francis  A.,  59. 
Wambaugh,  Eugene,  152,  169. 
Wayland,  Francis,  8. 
Webster,  Daniel,  283. 
Wells,  David  A.,  291,  292,  293. 
Weskett,   John,    114,    115,    116,    118,    lao, 

129,  145. 
Westergaard,  Harold,  40. 
Westermarck,  B.  E.,  40. 
Wharton,  Thomas,  160. 
Willett,  Allan  H.,  6,  32,  50,  78,  87. 
Wilson,  James,  211, 
Wolford,  George,  27, 
Woodruff,  Maj.  Charles  E.,  24. 
Wright,  Elizur,  42,  285. 
Wynne,  James,  17. 

Young,  Thomas  E.,  9,  10,  333. 

Zartman,  Lester  W.,  288. 
Zouch,  Richard,  101. 


352 


INDEX 


Abuses   in   insurance,  effect  of, 

147- 

Accidents  in  mining,  23;  on 
railways,  37. 

Accountancy,  insurance  and,  66. 

Act  6  George  I,  122,  156,  160, 
173;  19  George  II,  112,  118, 
152,  164,  166-168;  of  1746, 
161;  of  Congress  on  insur- 
ance, first,  190. 

Acts  of  14  George  III,  152;  of 
4th  and  5th  William  and 
Mary,  153. 

Actuarial  responsibility  for  re- 
serve calculation,  250. 

Actuarial  Science,  9,  10. 

Administrative  and  judicial 
functions  of  German  sup- 
ervising department,  261. 

Administrative  law  of  insurance, 
German,  231. 

Admiralty  jurisdiction,  colonial, 

149- 

Admiralty  law,  insurance  a 
branch  of,  148. 

Admiralty  practice,  American, 
148. 

Adventure,  merchant,  and  insur- 
ance, 67. 

Adverse  legislation,  effect  of, 
148. 

Advertisements,  compulsory  re- 
quirement of,  T97;  early 
insurance,  104,  155,  159, 
185,  187. 

Advisory  Council  to  German  Im- 
perial Insurance  Depart- 
ment, 238,  239. 

Agencies,  necessity  of,  30. 


Agents,  praise  of,  42. 

Agreements  of  underwriters 
before  the  Revolution,  177. 

Alabama  Claims,  120. 

Alba,  Duke  of,  insurance  pro- 
hibited by,  148. 

America,  first  mentioned  in  Eng- 
lish insurance  law,  162; 
beginnings  of  insurance  in, 
104. 

Amicable  Contributionship,  155, 
171. 

Amory  vs.  Gilman,  166. 

Ancient  and  modern  law,  in- 
terdependence of,  205. 

Ancient  law,  principles  of,  205. 

Annual  reports  of  German  sup- 
ervising departments,  253. 

Annual  statements  required  in 
Germany,  249. 

Annuity,  definition  of,  68;  pro- 
posals before  the  Conti- 
nental Congress,  176. 

Anthropology,  20. 

Anthropometry,  10,  20. 

Appraisal  of  real  estate,  Ger- 
man method  of,  256. 

Arbitrations,  international,  insur- 
ance in,  128. 

Arguments  on  Federal  super- 
vision, by  John  F.  Dryden, 
212;  on  uniform  law  and 
legislation  on  insurance,  by 
John  F.  Dryden,  214. 

Assets  of  American  life  insurance 
companies,  37,  80. 

Association  of  Life  Insurance 
Presidents,  289. 

Assurance  and  insurance,  hi. 


353 


INDEX 


Assurance  Companies  Act  of 
1909,  326. 

Austria,  life  insurance  supervi- 
sion in,  228. 

Average,  definition  of,  335;  law 
oi,  77»  333;  principles  of, 
91;  doctrine  of  97;  proper 
use  of,  336;  practical  use 
of,  339;  lifetime,  335. 

Banking  problems,  37,  38. 

Bibliography  of  insurance,  43; 
of  insurance  as  a  science, 
46-49 ;  of  insurance  econom- 
ics, 89;  of  insurance  as  an 
element  of  eariy  commerce, 
133;  of  the  origin  and 
growth  of  law  and  legisla- 
tion on  insurance,  216;  of 
government  supervision  of 
insurance  in  Germany,  266; 
of  insurance  taxation,  311; 
of  English  insurance  legis- 
lation, 331;  of  law  of  aver- 
age, 350. 

Bills  of  exchange,  113. 

Biological  science,  10. 

Board  of  Insurance  Commis- 
sioners, Mass.,   198. 

Board  of  Trade,  supervision  of 
insurance  by  the,  326. 

Boiler  inspections,  value  of,  73. 

Bond  or  endowment  certificates, 

327- 
Boston   Fire   and   Marine,    187, 

196. 
Boston  Marine  Ins.  Co.,  189. 
Boston     Tontine     Association, 

180. 
Bottomry  bonds,  92,  94,  124,  143, 

144,  189. 
Bottomry  loans,  112,  114. 
Bubble  Act,  156,  160. 


Burgundy,  Edict  of  Count  of,  147. 

Business,  relation  of  insurance  to, 
64,  80,  94;  morality,  prin- 
ciples of,  109;  of  insurance, 
the,  94;  protection,  by  in- 
surance, 79. 

California,  insurance  supervi- 
sion in,  199. 

Canon  law  of  usury,  96. 

Capital,  accumulation  of,  by  in- 
surance, 36,  78,  79. 

Capture,  insurance  against,  118, 
163,  189. 

Career,  insurance  as  a,  42. 

Census  of  Boston,  16;  of  Charles- 
ton, 16. 

Chambers  of  insurance,  100,  145. 

Chance,  contracts  depending  on, 
103;  element  of,  341. 

Charitable  insurance  corpora- 
tions, 172. 

Chartered  Companies,  early, 
record  of,  195. 

Charters,  early,  insurance,  185, 
186;  of  limited  duration, 
189. 

Children,  diseases  of,  14;  life  in- 
surance of,  in  Germany,  259. 

Classics,  foremost,  insurance,  109. 

Climate  and  Health,  23,  24. 

Coal  mining,  accidents  in,  23. 

Code  of  insurance,  first,  99. 

Colonial,  admiralty  charters, 
reference  to  insurance  in, 
1 49-1 50 ;  insurance  law,  203 ; 
laws  of  insurance,  157,  165; 
legislation  on  insurance  not 
required,  165 ;  policies,  Amer- 
ican, 169;  policies,  phrase- 
ology of,  98. 

Commentaries  on  American  in- 
surance law,  203. 


354 


INDEX 


Commerce,  defined,  io8;  devel- 
oped by  insurance,  34;  in- 
surance as  an  element  of, 
34,  50.  5i»  53.  54,  182; 
relation  of  insurance  to,  84, 
109,  122,  123,  193,  198, 
204;  insurance  in  early,  91; 
enlarged  by  insurance,  loi; 
insurance  as  a  branch  of, 
104;  insurance  in  actual, 
124,  131;  insurance  a  bene- 
fit to,  168,  183;  accommo- 
dated by  insurance,  187; 
insurance  as  a  branch  of 
German,  230;  and  naviga- 
tion, 108;  clause  of  the  cons- 
titution, reference    to,    178. 

Commercial  development  and 
insurance,  91. 

Commercial  jurisprudence,  in- 
surance in,  153. 

Commercial  power  conserved  by 
insurance,  86. 

Commercial  risk,  disregard  of,  54. 

Commercial  security,  enhanced 
by  insurance,  no,  in, 
121. 

Commercial  value  of  insurance, 

dis- 
common knowledge  on  insurance, 

value  of,  208. 
Common   law   of   insurance,    153, 

164,  165,  202. 
Companies'     Acts,     reference     to 

insurance  in,  328. 
Company,  use  of  term,  174,  177. 
Complaints,    methods   of   dealing 

with,     in      Germany,      249, 

257. 
Compulsory  insurance,  71;  early 

suggestions  for,  146. 
Conflict  of  law,  202,  213. 
Congress  of  Arts  and  Science,  5. 


Congress,  power  of,  over  insur- 
ance, 191;  attitude  of,  on 
insurance,  209. 

Congressional  action  on  Federal 
supervision,  history  of,  209. 

Congressional  Record,  discus- 
sion of  insurance  taxation 
in,  275. 

Connecticut,  insurance  supervi- 
sion in,  199, 

Constitutional  aspects  of  insur- 
ance, 192,  207,  211. 

Constitutional  Convention,  in- 
surance at  the  time  of  the, 
179. 

Constitutional  law  of  insurance 
in  Germany,  231. 

Continental  Congress,  consider- 
ation of  insurance  by,  176. 

Contingencies,  provision  for,  6. 

Contraband  goods,  insurance  and, 
120,  154. 

Contract  of  insurance,  140, 
141;  importance  of,  204; 
German  code  of  the,  231. 

Contract  Law  of  Insurance,   29. 

Contractual  basis  of  insurance,  93 

CoNTRiBUTiONSHiP,  principles  of, 
91,  92. 

Co-operation,  need  of,  310. 

Corporation,  first  American  in- 
surance, 180;  franchises  de- 
fined, 302;  income  tax,  true 
object  of,  290. 

Corporations,  insurance,  26;  in- 
surance by,  84;  advan- 
tages of  insurance,  150, 
160,  183,  186;  history  and 
tendency  of,  200;  future  of 
221;  necessity  of,  201. 

Cost  of  Imperial  supervision,  240; 
relation  of  insurance  to, 
65. 


355 


INDEX 


Council  of  Revision,  considera- 
tion of  insurance  by,    192. 

Court  decisions,  German,  on  in- 
surance, 261. 

Court  of  Insurance,  29,  100,  151. 

Credit  and  Insurance,  8,  51,  57, 
68,  104. 

Credit  insurance,  51. 

Currency  problems,  37. 

Dangerous  trades,  insurance  pro- 
tection for,  63. 

Decisions,  American  insurance, 
202. 

Delusions,  follies  and,  20. 

Departmental  powers  over  insur- 
ance management,  in  Ger- 
many, 247,  248. 

Departmental  rulings,  in  Ger- 
many, not  subject  to  appeal, 

239- 
Deposits  required  by  English  law, 

327- 
Dictionary   of   insurance,   first, 

115. 

Diplomatic  correspondence  of 
the  Revolution,  128. 

Discrimination  against  local  com- 
panies, 198. 

Diseases  of  miners,  23. 

Distribution,  insurance  as  a  fac- 
tor in,  50,  85;  of  wealth  by 
insurance,  62. 

Disutility  of  no  insurance,  85. 

Dividend  plan  of  German  life  in- 
surance companies,  259. 

Dividends  in  life  insurance,  legis- 
lation concerning,  197;  paid 
by  German  stock  companies, 
243;  relation  of  taxation  to, 
278. 

Documents,  preservation  of,  96; 
value  of  commercial,  96. 


Double  taxation,  277. 

Drawbacks  and  duties,  117. 

Dryden  bills  for  Federal  super- 
vision, 209. 

Dutch  origin  of  marine  insurance 
practice,  147. 

Duty  of  insurance,  8. 

Dwarfs  and  giants,  343. 

Earliest  English  policy  in  Ita- 
lian, 150. 

Earliest  policy  in  English,  150. 

Early  English  law  on  insurance, 
152. 

Early  insurance  offices  of  Mas- 
sachusetts, 175. 

Early  practice  of  insurance,  146. 

Early  reference  to  insurance  in 
England,  151. 

Early  status  and  extent  of 
insurance  in  America,   209. 

Economic  function  of  insurance, 
76. 

Economic  gain,  resulung  from  in- 
surance, 88. 

Economic  theory  of  insurance, 
68. 

Economics  defined,  69. 

Economics,   insurance,    5,   22,   31, 

50. 
Economy,  duty  of  government  to 

practice,  292. 
Education  in  insurance,  42,   115, 

124,  288,  306. 
Electricity,  25. 
Enemy,   insurance  on   trade  with 

the,  119. 
English    Insurance    Legislation, 

153.  326. 
English  and  American  insurance 

law,  166,  184. 
English   law  adopted  by  Amer- 
ican courts,  167,  168. 


356 


INDEX 


Episcopal  Church,  Life  Tables 
of,  1 6. 

Episcopal  insurance  corporation, 
171,  172,  173. 

Equitable  Society  of  London,  11. 

Ethics  of  insurance,  7. 

European  and  Albert,  326. 

Evening  Post,  New  York,  273, 
281. 

Examination  of  insurance  com- 
panies in  Germany,  262. 

Experience,  value  of,  334. 

Extra  premium  charges,  17. 

Factory  system,  effect  of,  24. 

Family  protection  by  insurance, 
61,  62. 

Farm  loans,  37,  255. 

Fecundity,  ii. 

Federal  Corporation  Tax,  289; 
should  be  repealed,  307. 

Federal  supervision  of  insur- 
ance, advantages  and  need 
of,  28,  179,  205,  210,  211; 
history  of  movement  for, 
208. 

Federal  taxation  of  life  insur- 
ance, 275. 

Fire  insurance  in  England,  early, 
53;  fimction  of,  explained, 
81;  companies,  early,  154; 
taxation,  154;  not  com- 
merce, 207 ;  in  Germany,  260, 

First  Act  of  Congress  on  insur- 
ance, 190. 

First  American  insurance  cor- 
poration, 180,  209. 

First  annual  report  of  Massa- 
chusetts department,  199. 

First  examination  requirements, 
188. 

First  fire  insurance  institution 
in  America,  169. 


First  fire  protection  company, 

170. 
First    Governor's    message    on 

insurance,  192. 
First  Hamburg  policy,  147. 
First     insurance     department, 

199. 
First  insurance   legislation  in 

the  United  States,  181. 
First  insurance  supervision  in 

America,  173. 
First    law   on    fire    insurance    in 

Massachusetts,  197. 
First  life  insurance  institution 

in  America,  171. 
First    Massachusetts    insurance 

charter,  175,  186. 
First  movement  for  Federal  regu- 
lation, 206. 
First  public  insurance  office  in 

America,  158. 
First  publicity  requirements,  188. 
Florence,   Code  of  Insurance  of, 

98. 
Florentine  statute  on  insurance, 

145- 

Forecasts,  accurate,  336,  337. 

Foreign  commerce,  advanced  by 
insurance,  iii. 

Foreign  insurance  companies, 
opposition  to,  182;  discrimi- 
nation against,  11 1;  status 
of,  in  Germany,  245;  reserve 
investments  of,  in  Germany, 
257;  requirements  of,  in 
Germany,  246. 

Franchise  taxes,  insurance,  302. 

Fraud  in  insurance,  106,  108. 

French  and  American  insurance 
law,  interdependence  of, 
205. 

French  Spoliation  Claims,  118, 
119,  126,  127,  130. 


357 


INDEX 


Friendly  Society  of  Charleston, 

170. 
Funds  and  their  uses,  308. 

Gain  and  loss  exhibit  required  in 
Germany,  249. 

Gambling,  7,  8;  disutility  of,  345; 
futility  of,  344. 

Gambling  and  insurance  con- 
trasted,   7,    72,    73,    78,   83. 

Gambling  Act,  152,  331 ;  extended 
to  America,  166-168. 

General  average  defined,  97. 

General  property  tax,  insurance 
and  the,  272. 

Genoa,  Statute  of,  162. 

Geographical  pathology,  21. 

Geology,  22,  23. 

German  insurance  code,  229,  265. 

Germany,  life  insurance  super- 
vision in,  228;  taxation  in, 
288. 

Gibbons  vs.  Ogden,  293. 

Girard  Life  and  Trust,  15. 

Goddard  vs.  Garrett,  164. 

Gold  Standard,  38. 

Gordon,  first  American  author  on 
insurance,  176. 

Goss  vs.  Withers,  117. 

GoTHA  Insurance  (  ompany,  258. 

Government,  German,  attitude 
towards  insurance  compa- 
nies, 233;  control  of  insur- 
ance, beginnings  of,  147; 
control,  increase  in,  201; 
fire  insurance,  59;  insurance, 
first  suggestion  for,  in  Amer- 
ica, 159;  regulation  of  insur- 
ance in  Germany,  effective, 
264. 

Hamburg  marine  insurance  com- 
panies, 187. 


Hand-in-Hand,  155. 

Happiness  promoted  by  insur- 
ance, 61,  63. 

Hay,  average  price  of,  339. 

Horses,  average  price  of,  339. 

Heredity,  ii. 

History  of  insurance,  $3. 

Hooper  vs.  California,  207. 

House  Committee  on  Judiciary, 
report  of,  209. 

Illicit  trade,  insurance  and,  204. 

Imperial  supervising  department, 
German,  234. 

Imperial  supervision,  scope  and 
purpose  of,  German,  234. 

Incidence  of  life  insurance 
taxes,  295. 

Income  protection,  by  insur- 
ance, 82. 

Income  tax  exlmption,  life  insur- 
ance premiums  and,  271. 

Income  tax  reductions,  296. 

Incorporeal  property,  defined, 
70. 

Indemnity,  insurance  as  a  contract 
of,  168. 

Indiana,  insurance  supervision  in, 
199. 

Individual  vs.  corporate  under- 
writing, 144. 

Individual  underwriting,  inse- 
curity of,  183. 

Inductive  method,  value  of  the, 
348. 

Industrial  assurance  companies, 
English  legislation  on,  330. 

Industrial  insurance.  Parlia- 
mentary discussion  of,  330; 
progress  of,  14;  in  England, 
33;  in  the  World,  19. 

Industrial  system,  place  of£in- 
surance  in  the,  51,  84. 


358 


INDEX 


Industrial  technology,  24,  25. 
Insanity,  increase  in,  12. 
,  Insolvency,  procedure  in  case  of, 

329. 
Insurable    interest,    152,    161, 

163-4,  33^- 

Insurance,  an  element  of  com- 
merce, 208;  and  saving,  78; 
definition  of,  6,  75,  78,  108, 
124;  economic  function  of, 
'70;  first  mention  of,  in 
American  literature,  103; 
in  admiralty  law,  149;  in 
American  colonies,  169;  in- 
dispensable to  society,  46; 
not    gambling,     7,     8,     52. 

Insurance  and  assurance,  legal 
distinction  in,  327. 

Insurance  Company  vs.  Dunham, 
148,  149. 

Insurance  Company  of  North 
America,  84,  103,  104,  125- 
127,  181,  184. 

Insurance  Company  of  the  State 
OF  Pennsylvania,  127,  184. 

Insurance  Critic,  280. 

Insurance  expense  inbusiness,  66. 

Insurance  failures,  early,  55. 

Insurance  Law,  25. 

Insurance  law,  early  Massachu- 
setts, 196, 

Insurance  policies  not  articles  of 
commerce,  205, 

Insurance  supervision  in  Eu- 
rope,   importance    of,    265. 

Insurance  taxation,  early  ob- 
jections to,  304. 

Interest  earnings,  relation  of 
taxes  to,  279. 

Interest  rate,  a  form  of  insur- 
ance, 56,  57,  59,  76. 

Interest  rates,  effect  of  decline 
in,  274. 


Inter-marriage,  ii. 

International,  business  of  in- 
surance is,  206. 

International  law,  insurance  in, 
28,  103,  128;  insurance  as  a 
problem  in,  246. 

Interstate  chaos,  result  of  over- 
legislation,  200. 

Interstate  commerce,  insurance 
an  element  of,  210. 

Interstate  insurance  business, 
180,  210;  German  super- 
vision of,  229. 

Interstate  trade  in  insurance, 
no  restraint  upon,  184. 

Investigations  of  insurance  in 
England,  early,  206. 

Investment  requirements  in 
Germany,  247. 

Investments  of  German  insur- 
ance companies,  254,  255. 

Jettison,  practice  of,  146. 
Judicial  interpretation  of  poli- 
cies,  166. 

Kentucky,  taxation  of  insurance 
in,  276. 

Large  companies,  value  of,  35. 

Law  a  progressive  science,  214. 

Law,  ancient  and  modern,  in- 
terdependence of,  203. 

Law,  insurance,  30,  83;  and  legis- 
lation, 140;  American,  121; 
growth  of,  191;  early,  106; 
early  works  on,  203;  first 
treatise  on,     121;    modem, 

113- 
Law  of  the  individual  life,  339. 
Law  of  large  numbers,  344. 
Law    Merchant,    insurance    and 

the,  83,  93,  99,  211. 


359 


INDEX 


Laws,  natural,  339. 

Legal  science,  insurance  as  a 
branch  of  25,  203. 

Legislation,  insurance,  27;  Ger- 
man method  of,  231,  265. 

Leipziger  Life  Insurance  Com- 
pany, 258. 

Lex  Mercatoria  Americana,  150, 
151,  190. 

Libraries,  insurance,  43. 

Licenses  and  fees,  cost  of,  276. 

Life  insurance,  a  semi-public 
function,  305;  ancient  meth- 
od of,  92 ;  beginnings  of,  in 
America,  181;  definition, 
270;  discouraged  by  taxa- 
tion, 272;  earliest  pamphlet 
on,  176;  nature  of,  284;  not 
for  profit,  286;  not  com- 
merce, 207 ;  of  children,  code 
governing,  260;  of  children, 
prohibited  in  France,  162; 
should  not  be  taxed,  270; 
value  of,  61,  270. 

Life  insurance  companies,  not 
money-making  institutions, 
284. 

Litigation  in  insurance,  30,  31. 

Lloyd's,  practice  of,  56,  158,  163, 
178;  Coffee  House,  114,  125; 
deposits  required  by  mem- 
bers of,  329. 

Lombard  Street,  reference  to, 
165,  166. 

London  Assurance,  156,  160. 

London  Coffee  House,  114,  125. 

Longitude  and  latitude,   17. 

Loss  prevention  and  insurance, 

6S- 
Lotteries,  52. 
Lottery    tickets,    insurance    of, 

192. 
Luck,  good  and  ill,  341. 


Manufacturers'  mutual  insur- 
ance companies,  73. 

Marine  insurance,  early,  in  Eng- 
land, 53;  development  of, 
96;  not  commerce,  207;  Ger- 
man supervision  of,  230. 

Maritime  interest,  143. 

Marriage,  relation  of  insurance  to, 
39»  40,  63. 

Massachusetts,  insurance  super- 
vision in,  27,  199;  liberal 
insurance  laws  of,  194. 

Massachusetts  Congregational 
Insurance  Society,  175. 

Massachusetts  Fire  and  Marine 
Ins.  Co.,  185,  186,  189,  195; 
charter  limitations  of,  188. 

Massachusetts  Hospital  Life 
Ins.  Co.,   15,   194. 

Mathematics  op  insurance,  9,  10. 

Medical  directors,  position  of, 
II. 

Medical  examination,  insurance 
without,  260. 

Medical  topography,  15. 

Medicine,  insurance,  11,  12. 

Memorial  to  New  York  Legis- 
lature on   insurance,    194. 

Merchants'  Coffee  House,  125. 

Meteorology,  23. 

Mining,  22,  25. 

Miners  Phthisis,  23. 

Misrepresentation,  31. 

Missouri,  insurance  supervision 
in,  199. 

Model  tables  used  by  German 
life  insurance  companies, 
258. 

Modern  law,  relation  of  early  to, 
202. 

Monitor,  Insurance,  274. 

Monopoly,  insurance  and,  55,  157. 

Mortality,  problems  of,  346. 


360 


INDEX 


Mortality  rates,  variations  in, 
346,  347- 

Mortality  statistics  of  the  Mu- 
tual Life,  13. 

Mortgage  loans,  on  city  real 
estate,  255;  effective  super- 
vision of,  255;  rules  govern- 
ing, in  Germany,  251. 

Mutual  Assurance  Company  op 
Philadelphia,  175. 

Mutual  insurance  in  Germany, 
241. 

Mutual  Life  Insurance  Com- 
pany, 13,  15. 

Mutual  Reserve,  reference  to, 
326. 

Mutualism,  insurance  a  form  of,  74. 

Nantucket  Insurance  Company, 

195- 

National  Bureau  of  Insurance, 
first  proposed,  206. 

National  commerce,  supported 
by  insurance,  106. 

National  Insurance  Office,  pro- 
posal for,  156. 

National  scope  of  insurance, 
181,  184,  185,  187,  197. 

Naval  and  commercial  juris- 
prudence, 122. 

Naval  interest,  95. 

Navigation,  insurance  as  a  factor 
in,  108,  204. 

Necessity  of  insurance,  85. 

Negative  economic  quantities, 
70. 

Netherlands,  insurance  in  the, 
148. 

Neurology,  science  of,  12. 

New  England  Sun  Fire  Office, 
169,  170. 

New  Hampshire,  insurance  super- 
vision in,  199. 


New  Jersey,  taxation  of  insur- 
ance in,  276. 

New  York,  insurance  supervi- 
sion in,  199. 

New  York  Life  and  Trust  Com- 
pany, 15. 

New  York  Life  vs.  Craven,  207. 

New  Lloyd's  institution,  177. 

Newark,  city  tax  suit,  273. 

Newburyport  Fire  and  Marine, 
196. 

Non-interference,  Englicy  pol- 
icy of,  331. 

Non-Participating  business,  ex- 
tent of,  in  Germany,  245. 

Non-Participating  business  in 
Massachusetts,  245. 

Numbers,  theory  of,  333. 

Objections,    early,    to    insurance 

taxation,  304. 
Ohio  Life   and  Trust  Company, 

15- 

Oleron,  Laws  of,  92. 

Opinion  of  Alexander  Hamil- 
ton on  insurance  regula- 
tion, 211. 

Opinion  of  James  Wilson  on  in- 
surance regulation,  211. 

Ordinance  of  Barcelona,  145, 
149,  162. 

Ordinance  of  Florence,  149,  150. 

Ordinance  of  France,  on  insur- 
ance, 92,  123. 

Ordinance  of  Hamburg,  119. 

Ordinance  of  Philip  II,  147. 

Ordinance  of  Venice,  149. 

Ordinances,  early,  of  insurance, 
98,  144. 

Ordinances  of  Genoa,  162. 

Ordinances  of  Portugal,  145, 
146. 

Ordinances  of  the  Marine,  i6a. 


361 


INDEX 


Ordinary  Insurance  by  Indus- 
trial companies,  36. 

Organization  of  German  Insur- 
ance Department,  237. 

Origin  op  Insurance,  ancient, 
142. 

Over-legislation,  evils  of,  200. 

Over-taxation,  evidence  of,  294, 
309- 

Panics  and  Depressions,  38. 

Papal  decree  against  bottomry 
bonds,  143. 

Participating  and  Non-Partici- 
pating business  permitted 
in  Germany,  245. 

Paul  vs.  Virginia,  205,  207. 

Pauper  Burials,  41. 

Pauperism,  prevented  by  insuf- 
ance,  41. 

Pediatrics,  science  of,  14. 

Penalties  and  fines  for  violation 
tion  of  insurance  code,  247. 

Penalties  of  non-compliance 
with  English  law,  329. 

Penn,  William,  on  insurance,  158. 

Pennsylvania,  early  insurance  in, 
125. 

Pennsylvania,  first  legisla- 
tion on  insurance  in,   181. 

Pennsylvania  Insurance  Com- 
pany for  the  Insurance  of 
Lives,  15,  194. 

Pennsylvania  Legislature,  in- 
surance petition  to,  125. 

Perpetual  annuities,  69. 

Perth  Amboy,  insurance  begin- 
nings in,  172. 

Petition  for  insurance  com- 
pany rejected  by  Massa- 
chusetts, 175. 

Petition,  insurance,  to  Pennsyl- 
vania Legislature,  182. 


Philadelphia  Board  of  Health, 
Life  Table  of,  16. 

Philadelphia  Contributionship, 
171. 

Phoenix,  of  London,  185. 

Phoenix  Insurance  Company  of 
Nantucket,  196. 

Piracy,  117. 

Policy  op  insurance,  nature  of, 
29. 

Policies,  early  American,  165. 

Policyholders,  unjustly  taxed, 
305;  interest  in  taxation, 
310;  protection  of  in  Ger- 
many, 235. 

Polly,  the  case  of  the  Schooner, 
128. 

PooK,  insurance  for  the,  33,  41, 
42,  58. 

Predictions,  accurate  and  erro- 
neous, 338;  approximately 
accurate,  347. 

Preliminary  term,  permissible  in 
Germany,  236,  252. 

Premium  income  of  German  insur- 
ance companies,  254. 

Premiums,  taxes  on,  273. 

Presbyterian   Ministers'    Fund, 

44,  171- 

Prevention  and  insurance  com- 
pared, 65,  75. 

Price,  relation  of  insurance  to,  58, 
67,  76. 

Pringle  vs.  Hartley,  119. 

Pritchard  vs.  Insurance  Com- 
pany, 168. 

Private  or  contract  law  of  in- 
surance, German,  231. 

Privateers,  The  Liverpool,  118, 
119. 

Privy  Council,  acts  of,  reference 
to  insurance  in,  151. 

Probability,  use  of  term,  334. 


362 


INDEX 


Problems  of  life  insurance  in 

Germany,  258. 
Profit  in  insurance,  53,  56,  57. 
Prohibition  of  bottomry  loans, 

143- 
Prohibition  of  life  insurance, 

early,  163. 

Prohibitory  laws,  early,  162. 

Prohibitory  legislation  in  Eng- 
land, 164. 

Projects,  insurance,  155. 

Property,  theory  of,  346. 

Property  protection  by  insur- 
ance, 85. 

Protection,  insurance  as  a  factor 
in,  50,  57,  75,  76,  85,  86, 
88;  cost  of,  and  insurance, 
67. 

prudentla.l  library,  43. 

Psychology  of  insurance,  i8, 
19,  20. 

Public  advantages  of  insurance, 
123. 

Public  interest  in  insurance, 
German,  232,  233. 

Public  policy,  insurance  and,  31, 
167. 

Public  welfare,  life  insurance 
and,  309. 

Publications,  German,  govern- 
ment, on  insurance  science, 
250. 

Publicity,  duty  of,  in  Germany, 
263. 

Publicity  requirements,  early, 
194,  195- 

Railway  bonds  as  investments,  3 7. 
Railway  developments,  36. 
Rates   of   insurance  during  the 

Revolution,  128. 
Rates     of     marine     insurance, 

lis- 


Regulation  of  insurance,  begin- 
ning of,  in  England,  100; 
early  demand  for,  105;  Ger- 
man, 235. 

Regulation  op  insurance  con- 
tract, 155. 

Re-insurance,  German  supervi- 
sion of,  230. 

Religious   aspects  of  insurance, 

43.  44,  45- 

Religious  objections  to  insur- 
ance, 7,  8. 

Report  of  House  Committee  on 
Judiciary  upon  the  constitu- 
tional aspects  of  insurance 
regulation,  179. 

Reports  of  insurance  compa- 
nies, 328. 

Reserve,  definition  of,  250. 

Reserve  requirements  in  Ger- 
many, 247. 

Reserve    fund    investments, 

rules     governing,     251;     of 
foreign  companies,  257. 

Reserve  funds,  separate  accoimt- 
ing  of,  in  Germany,  252; 
supervision  of,  in  Germany, 
256. 

Respondentia  bonds,  92,  124,  143. 

Retaliatory  legislation,  dan- 
gers of,  193. 

Returns,  early  requirements  of, 
196;  objectionable,  198. 

Revolution,  insurance  practice 
during  the,  128. 

Rhodian  Sea  Law,  91,  92,  95,  97. 

Richards  vs.  Marine  Insurance 
Company,  120. 

Risk,  theory  of,  6;  estimate  of,  55, 
87 ;  compensation  required 
for,  76;  reduction  of,  by  in- 
surance, 80;  transference  of, 
87. 


363 


INDEX 


Risk  assumption,  specialisation  of, 

74. 
Risk  avoidance,  8i. 
Royal     Exchange     Assurance, 

156,   160. 
Royal  message  on  insurance,  iii. 
Rules  and  customs  of  Boston, 

173- 
Russo-Japanese  War,  120. 

Saddlers  Company  vs,  Badcock, 
112,  164. 

Salem  Marine  Insurance  Com- 
pany, 196. 

Salvation    Army,    insurance    by, 

44. 

San  Francisco  earthquake,  re- 
lation of,  to  insurance,  260; 
losses  paid  by  German  com- 
panies, 260, 

Sanitary  Science,  15. 

Saving  habits,  fostered  by  insur- 
ance, 32. 

Science,  insurance  as  a,  45,  106; 
function  of,  334. 

Sciences,    classification    of,    5, 

45- 

Scientific  methods,  value  of,  77. 

Security,  importance  of,  79. 

Select  Committee  of  Friendly 
Societies,  6. 

Select  Committee  on  Assurance 
Companies,  140. 

Selection  of  risks,  18. 

Self-insurance,  53,  65,  66;  fal- 
lacies of,  77. 

Shareholders  profits  in  German 
insurance  companies,  244. 

Smelting  and  refining,  25. 

Smuggling,  117,  154. 

Social  device,  insurance  a,  87. 

Social  economics,  insurance  in, 
61. 


Social  gain  resulting  from  insur- 
ance, 6. 

Social  progress,  how  achieved, 
72. 

Social  reform,  40. 

Social  science,  39. 

Social  value  of  insurance,  7, 
285. 

Soil  surveys,  value  of,  22. 

Southern  death  rates,  17,  18. 

Spectator,  326. 

Speculation,  economic  aspects  of, 
72;  futility  of,  344;  and  in- 
surance contrasted,  7. 

Stamp  Act,  first  on  insurance  by 
Congress,  190;  insurance  re- 
ferred to  in  the,  174. 

Stamp  duties  on  insurance,    154. 

Stamp  taxes,  275. 

State  interference,  dangers  of, 
193;  evils  of,  216. 

State  legislation,  gradual  in- 
crease in,  194, 

State  supervision,  of  insurance, 
27,  28;-  inception  of,  186; 
beginnings  of,  188;  develop- 
ment of,  195;  modem  sys- 
tem of,  199;  conflict  of,  212; 
cost  of,  276. 

Statistical  returns,  early,  195, 
198. 

Statutory  law  of  insurance,  165. 

Statutory  requirements,  Massa- 
chusetts, early,  196;  present, 
200. 

Steam  boiler  insurance,  65. 

Stock  companies,  legal  status  of, 
in  Germany,  242. 

Stock  control,  limitations  of,  186. 

Stockholders,  protection  of,  in 
Germany,  235,  242. 

Stockholders'  profits  not  limited 
in  Germany,  244. 


364 


INDEX 


Suggestion,  psychology  of,  20. 

Suicides,  13,  20,  30;  forecast  of, 
348. 

Sun,  New  York,  303. 

Sun    Fire,    155. 

Sunday  School  societies,  insur- 
ance by,  44. 

Supervision  of  insurance,  26; 
government,  140;  reasons 
for,  141,  145;  by  the  Church 
of  England,  172,  173;  effec- 
tive in  Germany,  237;  an 
independent  judicial  branch 
of  the  German  government, 
238;  extent  of,  in  Germany, 

253- 

Supreme  Court  decisions  on 
insurance,  180,  205,  206, 
210. 

Supreme  Court  of  Pennsylva- 
nia, early  insurance  case, 
166. 

Suretyship  and  warranty,  83. 

Surgery,  science  of,  13, 

Surplus,  taxation  of,  274. 

Switzerland,  life  insurance  super- 
vision in,  228. 

Systematic  savings  habits,  78. 

Talmud,  reference  to  insurance  in, 
142. 

Tax,  burden  on  the  aged,  299; 
reduction  necessary,  300 ; 
burdens  upon  losses,  303; 
increase  in,  suggested,  308, 
reduction,  plea  for,  309. 

Tax  exemption,  results  of,  271. 

Tax  problem  re-stated,  307. 

Tax  problems,  constitutional  as- 
pects of,  293. 

Tax  rate,  comparative,  310;  Ger- 
man and  American,  297. 

Tax  reform,  need  of,  287. 


Taxation,  burden  of,  277;  dis- 
criminatory, 194;  theory  of, 
269;  of  necessities,  294; 
State  and  Federal,  293;  in- 
equalities of ,  294. 

Taxation,  of  insurance,  first,  154; 
in  America  and  Germany 
compared,  265;  taxation  of 
insurance,  268;  amount  paid 
by  life  insurance  companies, 
269;  economic  justification 
of,  271;  practice  of  life  in- 
surance, 272;  on  premiums, 
2  73 ;  early  discussion  of,  274 ; 
on  surplus,  274;  diversities 
of  State,  276;  increase  in, 
277;  double,  277;  relation 
of  to  cost  of  insurance,  278; 
comparative  increase  in  busi- 
ness and  taxes,  279;  burden 
on  policyholders  of ,  279;  in- 
cidence of,  280 ;  discussion  of, 
280;  argument  against  in 
Congress,  281  ;paid  by  policy- 
holders, 282;  need  of  public 
consideration  of,  282;  a  tax 
upon  a  tax,  282 ;  unjust,  283 ; 
relation  of  to  cost  of  insur- 
ance, 284;  increase  of,  285; 
insurance,  opposed,  285 ;  rate 
of,  285;  of  reserves,  menace 
of,  287;  by  Federal  govern- 
ment, 289;  should  be  for 
revenue,  291;  moral  aspects 
of,  291;  ethics  of,  303;  sta- 
tistics of,  294;  European 
methods  of,  297;  sphere  of, 
301 ;  without  representa- 
tion, 301;  public  interest 
in,  301;  rational  system  of , 
304;  imjust  discrimination 
in,  305;  imiform  laws  on, 
309- 


365 


INDEX 


Taxes,  paid  by  German  compa- 
nies, 295;  paid  by  policy- 
holders, 295;  comparative, 
German  and  American,  295; 
in  Canada,  296;  in  Australia, 
296;  gross  inequality  of, 
298,  299;  insurance,  in  Italy, 
298;  on  property,  272. 

Technical  skill,  employment  of, 
in  German  insurance  super- 
vision, 238. 

Tendencies,  modem,  in  insurance, 

35- 

Texas,  insurance  commissioner  of, 
308. 

Theory  of  risk  and  insurance, 
31,  86. 

Theory  of  State  Supervision, 
origin  of,  215. 

Thermometry,  10. 

Thrift,  compulsory,  71;  taxation 
of,  269,  270. 

Trade,  discourse  on,  105;  insur- 
ance as  a  branch  of,  158, 
159;  insurance  for  encour- 
agement of,  164;  of  insur- 
ance, the,  52,  54,  55,  98,  99. 

Transportation,  science  of,  36. 

Treasury  report,  reference  to 
taxation  in,  278. 

Uganda,  medical  survey  of,  22. 

Uncertainty,  effect  of,  6. 

Uncertainty,  and  property,  75. 

Underwriters,    individual,    125. 

Underwriting,  early  practice  of, 
56;  individual,  84;  early 
Colonial,  125. 

Uniform  legislation,  need  of, 
202,  213. 

Uniformity  of  insurance  prac- 
tice, early  need  of,  98, 
99. 


Union  Fire  Insurance  Company, 

155. 
Universal  tontine,  180. 
Usage  of  merchants,  legal  effect 

of,  166. 
Usury  laws  and  insurance,  94,  95. 
Utility  of  insurance,  73,  74,  79, 

84,  115,  204. 

Valuation,  German  method  of, 
250. 

Value  of  insurance,  6,  32,  34, 
55,  85,  86,  no,  126. 

Variation,  law  of,  342. 

Venice,  Ordinance  of,  98. 

Vermont,  insurance  supervision  in, 
199. 

VisiTORiAL  powers,  early,  197. 

Vital  statistics,  17. 

Voluntary  insurance,  advan- 
tages of,  71. 

Wagering  contracts,  105,  163, 
167,  168. 

War,  insurance  in,  119,  120;  in  its 
relation  to  insurance,  128, 
129,  130,  131 ;  effect  of,  upon 
premium  rates,  178;  taxes 
on  life  insurance,  275,  281, 
294. 

Warranty,  effect  of,  31. 

Wealth,  distribution  of,  36. 

Weekly  Underwriter,  308. 

Westminster  Fire  Insurance 
Company,  155. 

Weston  vs.  the  City  of  Charles- 
ton, 294. 

Widow  schemes,  39. 

WiGGLESWORTH    LiFE    TaBLE,    17$. 

Williams  vs.  Craig,  i66. 
WisBY,  Laws  of,  92. 
Women  as  insurance  risks,   13. 
Women, medical  examination  of,  14. 


366 


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W  0557 


i^UL^ 


220903 


